Gap in the market
I recently posted the following on LinkedIn:
In a recent phone call with an M&A advisor, I was told that in my area of the market I would be "pretty much left alone."
Music to my ears.
One way to improve your probability of entrepreneurial success is to play where others aren't, thereby reducing competition. The #searchfund model is designed to do just that by addressing a gap in the market. We acquire businesses that are too small for traditional private equity and too big for most individuals.
Since then I have had a number of conversations with advisors, searchers, brokers, attorneys, bankers, and investors that have confirmed this thesis in Australia. Traditional private equity firms play above A$5 million EBITDA, and as far as I can tell there are a dozen or so private equity shops that play in our target size range, but each of them does 1-2 deals per year, and even they shy away from the smaller end of our range.
When I speak with senior officers at the country’s largest commercial banks, they paint a dire picture. Every other conversation, they say, is about succession for one of their clients, and many of them are lacking options.
According to PwC’s 2017 Once in a Lifetime report, 83% of privately owned businesses in Australia have no succession plan. In many cases, this is because the next generation doesn’t want the business. They’d rather join a sexy startup or big brand, or start something of their own, or travel the world… nearly anything but run their parents’ old mining equipment maintenance business. Eyes then turn to private equity as an alternative, but any business doing under A$4-5 million EBITDA will struggle to get the attention of the more established PE firms. Finally, there’s the trade sale, but this is only occasionally an option for the SME owner, and the idea of selling out to a competitor can often be hard to stomach.
Thus the gap in the market.
This gap exists elsewhere in APAC as well. In China, around 80% of second-generation heirs have no desire to join the family business, and many are pointing to the need for Chinese families to look outside the family for succession planning. We see similar challenges in Japan, Korea, and Singapore to name a few. Globally, about 60% of privately owned businesses have no succession solution.
While I don’t yet have the data to support this theory, my anecdotal observations show that the problem is likely more pronounced in smaller, less sexy family businesses, which are even less attractive to the next generation. These are the businesses that are especially in need of a succession solution. And though the threshold varies by country, private equity activity levels are generally lower at the smaller end of town.
Search fund entrepreneurs provide a great succession solution to these family businesses. Not only do the business owners have the opportunity to cash out a fair price, they can also generally feel at ease when it comes to their legacy, at least relative to a more traditional exit scenario. This is because search fund buyers are simply looking to place themselves into the shoes of the seller and continue where the seller left off. They generally have no intention to rebrand, relocate, close down, or gut the businesses they acquire, which makes it easier for the seller to announce the transition to employees, partners, customers, and other stakeholders, and easier to remain an active member of the community with head held high.
There is a social benefit here too. This gap in the market, left unaddressed, will result in the death of many otherwise-healthy businesses, simply for lack of succession solutions. SMEVentures is a small outfit, and we certainly don’t plan to be the solution for every business in need of an alternative succession solution, but where we succeed others will naturally follow, and together we’ll help transition a generation of fantastic small businesses to an incoming wave of eager entrepreneurs.
Action items
Find the stats in your market. What is the need? Where is the gap? Learn to clearly articulate how you can fill that gap.
Find investors in your market with a similar thesis, but who are acquiring larger businesses. Learn how they pitch themselves and their thesis. Talk to them - you never know what partnerships my unfold in the years to come.
