The SMBuyer Way to Buy a Small Business

Adam Hoeksema
January 8, 2024
2 min

In my last post - What Makes a Small Business Unsellable - I highlighted how I believe it is the fees associated with selling a small business in the “traditional way” that I think could be the reason why so many small businesses are unsellable.  The takeaway was that for a small business valued at less than $1 million, you could expect at least 20% of the purchase price to go straight to fees of various kinds.  After you throw in a seller note and taxes, the business owner might only end up with 50% to 60% of their sales price in cash on day 1.  

This doesn’t sound great, but this seems to be the common approach I see online.  

In order for the roughly 2 million SMBs owned by baby boomers and valued at less than $1 million to sell in the coming years, I think we might need to get a little bit creative in our approach to buying and selling businesses.  

Because there will be a significant increase in supply of businesses for sale, I think it means there is more opportunity for buyers to be creative with their approach to buying a business.  For lack of a better name, I am calling this “The SMBuyer Way” to buy a small business.  I think this approach has the opportunity to save roughly $150,000 in transaction fees for your typical $1 million small business.  

First let me outline the 5 key pillars of the approach and then I will get into the math. 

The 5 pillars of the SMBuyer way

  1. Find off market deals - save 10% business broker fee.
  2. No formal valuation - Use standard industry revenue or earnings multiples to value the business - avoid the business valuation fee.
  3. Finance with a seller note - Use a seller note and downpayment from the buyer to finance the transaction - avoids SBA fees, speeds up transaction time, buyer can refinance seller note with a bank loan post acquisition. 
  4. Retain the seller as a consultant - Use a consulting agreement with the seller to compromise on the initial sales price and allow the seller to earn more by helping to ensure a smooth transition.
  5. No investors - Avoid bringing in outside investors because the added complexity and cost likely doesn’t make sense on deals less than $1 million.

We think the approach allows the buyer and seller to save the following on the typical $1 million SMB acquisition:

  • $100,000 on business broker fees
  • $10,000 on business valuation fees
  • $20,000 on loan closing, loan processing, and SBA guarantee fees
  • $20,000 on legal fees

Total Savings $150,000

Let me start by saying that I realize this approach isn’t going to work for every situation and every deal is different.  

I plan to do a deep dive on each of the 5 pillars to talk more about the pros and cons of each.  

I already hear you telling me that the seller will never go for this, and I agree that for the top 10% of quality small businesses, they will have lots of options to sell, and they probably aren’t going to go for a large seller financing percentage. 
But I spent 10 years as an SBA lender and I can tell you that most small businesses valued at less than $1 million are messy.  I think the lower 90% of small businesses are going to have to get more comfortable with compromise. 

I think sellers will realize this over time and ultimately realize that getting some value out of their business is better than nothing and will be willing to work with a good buyer that they believe will carry their business forward.  

Ultimately, I think the SMBuyer way could allow buyers to put together the most compelling offer for a seller because when you save $150,000 in fees on a $1 million transaction, it means your offer as a buyer can come with a lower purchase price (good for the buyer) and might still put more cash in the seller’s pocket (good for the seller).  

So… that is the premise.  

I am going to try to put my theory to work and share more about what kind of business I hope to buy using this approach in 2025.

Read:  What Kind of SMB am I Looking to Buy

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