Historically, buying a business was reserved for private equity funds, larger corporations, or employees with a generous owner. Over the past decade, there has been the rise of the “acquisition entrepreneur” – individuals who chose to buy a business rather than build one.
Many of these individuals come from a background in the trades or corporate America. And most do not have six or seven figures in liquid assets to use in a downpayment on a business. This is where small business equity investors can come into play.
There is a growing universe of investors who assist acquisition entrepreneurs in purchasing small businesses. These investors often contribute funds to help with the down-payment of the business. Most of the time, these transactions result in the acquisition entrepreneur owning 60-90% of the acquired business with investors owning the remaining.
What type of investors participate in small business acquisitions?
There are three types of investors who participate in small business acquisitions.
The first is High Net Worth (HNW) individuals. These may be other business owners, doctors, lawyers, or RE investors. Typically, these individuals meet the requirements of being an “accredited investor” and enjoy investing in alternative assets.
The second is family offices. Family offices are institutions set up by a family to manage their money. Typically, you start to see family offices when a family has a net worth north of $100M. Given many families made their money through entrepreneurship, they often have a mandate related to investing in businesses. A growing number are participating as limited partners in business acquisitions.
Lastly, there are a few investment funds that have cropped up in the past few years dedicated to funding acquisition entrepreneurs. Examples include Nick Haschka’s Cub Investments.
Where can I find investors to help me buy a business?
When looking for investors, the first place to look is your network. Do you have any friends and family who may be interested in writing a check? What about a previous boss or mentor?
Beyond that, some entrepreneurs find success in networking within the SMB community. That can mean pitching or joining angel investing groups or attending conferences.
Lastly, you can work with a platform like Mainshares, who has an affiliated broker-dealer who focuses solely on helping acquisition entrepreneurs finance their deals.
What are the basic terms for an investment in a small business acquisition?
Typically, these investments are structured as preferred participating equity. What that means practically is that investors earn a “preferred return” on their investment. After their preferred return and investment are paid-back, the distributions or proceeds from an eventual sale follow a split per common ownership. Given that acquisition entrepreneurs will often own 60-90% of common equity, they will receive the lion’s share of distributions once the initial investment has been repaid.
What do investors look for in a small business buyer?
Investors are typically looking for three major criteria when speaking with acquisition entrepreneurs. First, they want to know that they are trustworthy and capable of managing finances. Practically, this means individuals with a clean background and strong personal credit, even if they do not have much in the way of liquid assets.
Second, they want to back entrepreneurs who have relevant operating experience, whether that is in the specific industry or a related function in another industry.
Last, they want someone who has leadership skills as evidenced by promotions, extracurriculars, etc. Small business ownership requires motivating and leading a team. Lone wolves will not make great stewards.
If you’re curious about becoming an acquisition entrepreneur and working with investors, the Mainshares platform is a great place to start. The team at Mainshares has deep experience in the small business acquisition ecosystem and has built a product to connect small business entrepreneurs and investors.
About the Judd Goodrich
Judd Goodrich is at the forefront of revolutionizing the SMB acquisition landscape at Mainshares. He guides savvy entrepreneurs in acquiring established cash-generating businesses, backed by a robust community of investors. Aspiring acquisition entrepreneurs? Look no further.