What’s Driving the Shift in the Small Business M&A Market?
Given the volatile nature of the job market, many white-collar professionals are ditching the traditional track of climbing the corporate ladder in favor of becoming small business owners instead. Customers may cut back on tech services during a recession, after all, but a burst water pipe will always require a plumber regardless of economic conditions.
While many of these workers are attracted to seemingly more stable career opportunities and the allure of becoming their own bosses, they also see significant opportunity in the upcoming “Great Wealth Transfer” from baby boomers to subsequent generations. As Walker Deibel highlights in Buy Then Build: How Acquisition Entrepreneurs Outsmart the Startup Game, $7 billion worth of small and medium businesses currently held by baby boomers will be available for purchase by 2030—meaning that there’s huge market potential.
How Firms Can Best Attract and Serve ETA Buyers
Billing Considerations
A significant part of attracting and serving ETA buyers comes down to understanding their financial situation, including budgetary constraints. That’s why, when it comes to catering to the unique needs of ETA buyers, offering alternative billing and fee arrangements can be essential. Unlike the traditional buyer, ETA buyers are often “self-funded searchers.” That means they’re actively looking for a business to purchase without the help of an investor, while simultaneously covering the costs of their own living expenses. As a result, they may be strapped for cash.
To better accommodate ETA buyers with tight budgets, creative billing structures like fixed-fee or delayed-fee billing can help by giving buyers a better sense of how to budget their legal expenses—without worrying about unexpected bills piling up.
Rules and Regulations
Attorneys should also be aware of common rules and regulations that pertain specifically to ETA buyers. Many ETA buyers, for example, choose to pursue Small Business Administration (SBA) loans, leveraging a combination of debt and equity for business acquisitions. A 2023 study found 58 percent of all self-funded searchers received funding through the SBA’s 7(a) loan. These loans often come with strict regulations and requirements.
One of the most critical regulations attorneys should consider pertains to personal guarantees. Individuals with 20 percent or more ownership in a business must sign an unconditional personal guarantee, which allows the lender to recover a loan’s full outstanding balance from the borrower. Self-funded searchers also must provide minimum equity injections to both mitigate risk and demonstrate dedication to the project. These minimum equity injections are often up to 10 percent of the total project cost.
In addition to regulations specific to self-funded searchers, the SBA’s standard eligibility requirements are applicable. There may be restrictions on business size, the nature of the business, and more. Attorneys can help advise ETA buyers on funding eligibility, proactively discussing any requirements that may impact risks or costs incurred by the borrower.
Due Diligence
With much less industry and business ownership experience, it’s essential that attorneys provide thorough third-party due diligence for ETA clients. This may involve a more rigorous review of financial statements, as well as important documents that M&A lawyers may not be accustomed to with their larger clients.
Due diligence is particularly important because ETA buyers are funding their own search. Without a robust financial safety net, unforeseen risks and liabilities could be detrimental. That’s where a great attorney comes in!
Common Pitfalls Attorneys Should Consider
There are risks involved when working with ETA buyers that attorneys can both monitor for and warn their clients about.
Loss of Key Relationships
The first common pitfall is the potential loss of clients or suppliers following a business purchase. Supplier or client loss is particularly common in small businesses that are deeply involved in their local communities, where personal relationships carry significant weight. Working closely with the seller to transition client and supplier relationships may help prevent this, especially when facilitated with proactive communication, early introductions, and joint meetings.
Seller Competition
Some sellers will aid in creating a smooth transition, but ETA buyers and their attorneys should also consider the risk of seller competition. The seller has already built one thriving business worth purchasing, and they’re walking away with extensive industry knowledge, experience, and contracts. They could take their post-sale cash reserves and start a new competing business. To prevent this, attorneys should advise their clients to put a noncompete agreement in the sale contract.
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Working with ETA buyers can come with a learning curve, especially for attorneys accustomed to working with large corporate buyers or search funds. Attorneys looking to cater to this new business buyer demographic should be aware of their unique needs and adapt their practice accordingly. While this may seem like more effort is involved, I’ve found that it’s well worth it: helping business buyers break out of the corporate cycle to become their own bosses can be incredibly rewarding work.
