Selling a Business - Private Equity? Investment Bank?

In my professional networking I recently participated in a "Speed Mentoring" meeting. Sounded perfect for me. With my short attention span and inquisitive nature, 10 minutes of conversation each with an investment banker, a private equity partner, a forensic accounting and trial expert witness and a VP of an asset management company was perfect. I learned more in an hour of what I have needed to know than I have been able to garner in years. For example, in follow-up conversations I learned that both the IB and the PE firms would not consider my client with almost $10M in revenues and $500k annual Free Cash Flow (FCF). Rather, they were looking for candidates much larger than those I know who want to sell or finance growth. The IB only considers companies with $25-100M in gross revenues. The PE partner looks for companies with EBITDA of $10-100M. Interestingly, in the 15+ years that the PE firm has been doing deals, only a handful have been within a 2-hour radius of the home office here in the Bay Area. (Their specialty is not high or bio tech.)

I concluded that a business that has grown its revenues to $10M is still small time these days. The IB'er suggested any buy-out or investment deal could be done with a good business transaction attorney. The timeline for closing an IB deal is about 6 months and the fees are about $500k. In other words, for small companies there is not enough in potential fees to have savvy, financial, MBA types work on the deal; just get the deal done, whatever it's sold for, and document it properly by a lawyer. That surprised me. I also felt sad because the small business owner might know how to run and grow their business but often does not know how to truly value their company and as a result might sell at far less than full value.

For small businesses (yes, $10M in revenues is small), that tells me that their capital needs are limited to the usual list of friends & family, angel investors, and banks. We all know banks don't give money without collateral so venture money for these businesses is quite limited.

So, about the idea of selling a business, of cashing out, well, if a buyer is ID'd then I would suggest working with them to agree on the best terms because other avenues for exiting are few. (A bird in the hand is worth 2 in the bush.) However you can, get a proper valuation done. Even if it costs $10k it might radically change your perception of the sale price.

If I come across more realistic ideas for selling "small" businesses I'll gladly share them.