The Big Small Business Opportunity

The Big Small Business Opportunity

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The Current Landscape

Small businesses are more critical to our domestic economy than you might realize — 99.9% of all businesses in this country are small businesses. They employ 46% of our workforce and are responsible for 44% of our total GDP. They’ve added nearly 13 million jobs to our economy over the last 25 years. They provide products and services to underserved markets. In a very real sense, they’re the foundation of our nation’s economy.

Despite their importance at local and national levels, institutional investment firms often overlook these businesses.

Generational Wealth Transfer

As the baby boomer generation ages, the U.S. is undergoing the largest-ever generational transfer of wealth; $84 trillion in assets is expected to change hands over the next 20 years — a large percentage of this wealth will be in small business ownership.

Many business owners are unprepared for this generational wealth transfer — 58% of small business owners currently do not have a succession plan for their business. It's often assumed that children or other family members will take the reins of the company, but this won’t be the reality for many.

87% of all small businesses are owned by Baby Boomers or Generation X, with only 13% belonging to Millennials. This might be because millennials may still be gaining life and work experience to start their own business. However, it also has to do with generational work preferences: from 2010-2020, there was a 32% increase in the number of college-educated young people living in an urban center (and these younger professionals don't always have a desire to run the business that mom or dad built).

Even if the next generation is interested in taking on the ownership responsibilities of their parents’ business, transitioning a company is hard. 30% of small businesses don't survive the transition from first generation to second, and this survival rate drops to 12% when transitioning from second to third.

There is a supply/demand mismatch here. Many of these businesses are too small to attract institutional purchasers. When you add depressed millennial interest to that market dynamic, it leaves many business owners without an option to retire or cash out on the businesses they’ve built. On one of the largest small business marketplaces, BizBuySell, over 200,000 businesses are posted yearly, with only ~30% of those finding a buyer.

Investment Opportunity

This landscape provides an excellent opportunity for the right investment firm to acquire and operate small businesses — just because they’re considered small doesn't mean they're not exceptionally run and present an attractive investment opportunity.

In addition to buying into a business with a proven business model and track record of success, there is often an opportunity to bring a fresh perspective to improve and continue to grow the business (for example, many small businesses haven’t built websites, don’t post on social media, haven’t embraced e-commerce, etc.). 

Small businesses can provide a great investment opportunity for a firm that can efficiently source opportunities and bring operational expertise to the small business.

Beyond pure return objectives, investing in these companies is essential to maintain the critical products and services they provide to their communities.

City Different Acquisitions

At City Different Investments, we’ve built our City Different Acquisitions strategy to target this small business opportunity. We're acquiring businesses with between $500k and $3MM in EBITDA; we underwrite these investments with an indefinite hold period, allowing us to deploy patient capital.

In addition to having a long-term perspective, we use little-to-no debt in all of our acquisitions — this allows us to reinvest in the business's long-term success.

Lastly, although we approach all of our deals with a lens of how we can improve operations, we are not looking to slash costs and reduce headcount — we want to partner with great people and put incentives in place to retain those great employees.

Many small business owners love what they do and feel a sense of loyalty to their employees and the customers they serve. With our small business acquisition strategy, we want to maintain this standard of care and preserve the legacy that the previous ownership group has built.

We're excited to discuss our approach with any small business owner who wants to start planning for an eventual exit from their business. Please contact Joel Van Essen if you'd like to learn more!

The information contained in this communication has been designed for general informational, illustrative, and educational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any security. Moreover, the information provided is not intended to provide any investment advice whatsoever. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product, or any non-investment related content, made reference to directly or indirectly in this communication will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. No discussion or information contained herein serves as the provision of, or as a substitute for, personalized investment advice. To the extent that a reader has any questions regarding the applicability above to his/her individual situation of any specific issue discussed, he/she is encouraged to consult with the professional advisor of his/her choosing. City Different Investments is neither a law firm nor a certified public accounting firm and no portion of this content should be construed as legal, tax, or accounting advice.

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