Recapping SMBash: Twitter, M&A and the SBA

Last week, my colleague, Alfredo Garcia and I, attended the inaugural SMBash Conference in Orlando, Florida. 

The event brought together the SMB (small and medium business) M&A community for two days of networking and educational panels focused on the ins and outs of buying, selling, and running SMBs. 

The event was hosted by Sam Rosati, Brandon Laughridge, and Matt Hinson, who, over the past few years, have built a community, mostly on Twitter, revolving around the SMB economy. The three of them have a combined 25k+ followers… and counting. 

Last week’s event was the trio’s first foray into in-person community building. The majority of the attendees had become familiar with many of the other attendees via Twitter, and this was the first time many were finally meeting in person.

By the way – if you are already involved in SMB M&A – make sure you give these guys a follow. You’ll thank me later!

Below, I lay out a few key takeaways from the event, and some valuable tips from the event’s panelists for all current or soon-to-be SMB owners. 

The Attendees

Most of the owners of small and medium businesses at the event were operating in the $500K to $3M EBITDA range. The investors in the room were looking to acquire businesses for an EV of between $2M – $10M. There were a wide range of industries represented, including roofing, HVAC, e-commerce, landscaping, insulation, trailer manufacturing, business services, and others. The diversity of industries in the room was an accurate representation of the diversity of SMBs powering the US economy today. 

Attendees tended to fall into one of the three following categories: 1) SMB business owners 2) Individuals in the process of acquiring an SMB 3) Investors and lenders looking to finance the individuals looking to acquire SMBs. 

The majority of the owner/operators in the room were between 30 – 45 years old on average, meaning they grew up in the age of the internet and were mostly comfortable with technology. Not a given in the world of SMBs. 

SMB Transaction Structures 

One theme that came up a number of times throughout the event was the SBA’s active involvement in the creation and cultivation of the SMB M&A market.

We heard multiple first hand accounts of buyers leveraging the SBA’s various loan programs to finance the majority of their acquisition, with little to no equity structured into the deal – very similar to traditional leveraged buyouts, but with a much less aggressive lending partner. Low upfront cash requirements and favorable loan economics allow for more cash flow and eventual upside, incentivizing activity in the SMB space.

One individual I spoke with put $5K down out of a total $2.5M purchase price for a business generating $750K in EBITDA. He raised $300K of equity from an investor, and ended up owning 70% of the company. In a year, he managed to double the business’ EBITDA, and now owns 70% of a company valued at $6M-$8M… after investing just $5,000 of his own money! 

While the risk/reward profile of owning and operating SMB assets can be shockingly attractive, it’s important to point out that no investments are without risk. 

6 Tips for Soon to be SMB Owners

The event was jam packed with educational content for owning and operating SMBs. Here are six of my top takeaways for anyone looking to dip their toes in the SMB waters:

1. Sellers of SMBs are looking to sell to individuals they can relate to, above all else. One investor I spoke with told me that the owner of the company he purchased mentioned not wanting to sell to a “suit.”
2. Buyer credibility comes more from values than experience. While you need to obviously have some baseline ability to run a business, good stewardship seems to be the value that stands out most to owners. These businesses are webs of relationships, not just financial assets. Nobody is going to sell to a buyer that gets in the way of those relationships.
3. Financing a deal with debt and equity is key. Debt, on the one hand, allows for maximum ownership and is fairly accessible in today’s economic environment. However, equity allows for a true partner to come into the business – someone that can hopefully provide valuable guidance, connections, and capital along the way – and minimizes the amount of cash leaving the business. 
4. When you do ink your first SMB deal, do no harm. Be intentional about introducing change. Be patient. Honor how the business was run before you, and respect the culture that the owner left behind. Focus on smaller changes that can improve employees’ lives in the first 3-6 months… a new website, technology to reduce manual labor, etc. And, as much as possible, consult with your new employees. This allows them to feel a sense of agency in driving positive change, while believing that you, the new owner, has the judgment to know what should or should not change.
5. Think thoroughly about the plans you present to your new company right after the acquisition. Expectation setting is vital. Anything you say, you have to deliver on, quickly, or risk losing credibility. 
6. Build as many relationships as you can with people other than the owner prior to day 1. Once you’ve made the acquisition, take the time to get to know people personally. Spend 3x the amount of time you originally thought to make employees know you care about them. Casual interactions like driving with them, walks, lunches, coffee, etc. are the best ways to build trust, and create venues to give and receive feedback organically, early on.

Wrapping Up

As I look back on the event, I can’t help but feel extremely bullish about the SMB opportunity. There were about 100 current/prospective owner/operators at the event. My hunch? There are at least 10x of these folks in the US today. 

It’s also remarkable to see how Twitter has become a crucial resource for individuals looking to invest in or become owner/operators of SMBs. One individual I spoke with sourced 2 deals via Twitter; another had invested alongside a handful of people he had met on Twitter; and a third got a job that he found from a Twitter post. This is the first time I’m seeing social-media based communities emerging in the private capital markets. It’s exciting, to say the least. 

Looking forward to SMBash 2023!