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  • Writer's picture37th & Moss

Succession Planning Strategy - The Benefits of Selling Your Small Business to an Operator



Selecting the Right Buyer for Your Small Business


Succession planning is a critical aspect of running a small business. As business owners approach retirement or decide to move on to new ventures, determining the best path for the future of a business becomes paramount. One of the more consequential decisions made by sellers is the selection of a buyer. Who is the best partner for your business?


Individual buyers have become an increasingly popular option for sellers, accounting for one-third of acquisitions among businesses valued between $2 million and $50 million. The individual buyer’s approach offers numerous benefits that can ensure a smooth transition for the team, preserve the business’s operating cadence, and provide financial security for the owner. In this post we’ll delve into the advantages of selling to an operator and how it can be an effective strategy for succession planning.



Graphic showing that operators are a great succession option.
Between 2018 and 2023, individual buyers represented one-third of deal activity among businesses valued between $2M and $50M.

Understanding the Role of an Operator


An operator is typically an experienced individual or entity with a proven track record of managing and growing businesses. Unlike a passive investor, an operator actively takes over the daily operations of the business, bringing in their expertise and resources to drive continued success. This hands-on approach can be particularly beneficial for small businesses that rely heavily on the owner's personal involvement and knowledge.


Ensuring Business Continuity


One of the primary benefits of selling to an operator is the assurance of business continuity. Small businesses often have unique cultures, customer relationships, and operational processes that can be disrupted by a change in ownership. An operator’s hands-on approach can seamlessly integrate into the business and assist in maintaining culture and operating process while the seller begins a transition. This continuity is crucial for retaining customers, employees, and suppliers, while also maintaining stability through the transition


The Tailwind of a Fresh Perspective


Operators bring a wealth of experience, operating knowledge, and a fresh perspective that can benefit the business. We often speak with owners who share that they’d like to see their businesses pursue growth opportunities, such as expansion into new markets or a more structured sales and marketing process, but that risk aversion as the owner nears retirement pauses the growth effort. For instance, hiring a new sales person may require six to twelve months of training and ramping up prior to that person reaching full capacity. For a seller contemplating a transition out of the business in 12 to 24 months, this timeline may be challenging. By selling to an operator, especially one with comfort stepping into a business development role, the company can benefit from a fresh perspective and a long term operating horizon that opens new doors for the business.


Preserving the Business’s Identity


For many small business owners, their business is more than just a source of income - it’s an identity formed by years of relationship building among employees and customers. Selling to an operator who understands and respects these relationships can be a comforting prospect. Operators are often motivated to preserve the essence of the business and to maintain a reputation, customer base, and community presence. This can be important for businesses that have strong ties to their local communities or specialized industries.


Financial Security and Favorable Terms


Selling to an operator can also provide financial advantages. Operators can raise acquisition capital from debt providers, such as the government backed Small Business Administration (SBA), or from equity investors, such as high-net-worth individuals or family offices. Between SBA financing and capital provided by equity investors, operators can offer competitive valuations for small businesses.


Graphic showing that retirement is the leading reason business owners sell.
Liquidity is an important succession planning consideration given the implication on retirement. Nearly half of sellers go to market due to retirement.


Flexible deal structuring is also an advantage of operators, especially for sellers who prioritize receiving a high percentage of cash at close relative to the company’s valuation. For sellers who want to remain invested in their business, rolled equity can provide appealing prospects for a second liquidity event. In this case, sellers may have the opportunity to maintain ownership by rolling a portion of their equity into the new entity, which is effectively an investment in the new management team. The combination of liquidity and reinvestment offers an attractive option for business owners looking to gain meaningful liquidity from a sale, but also who desire to maintain an allocation to an equity investment.


Minimizing Transition Risks For Teams and Customers


The transition period during a business sale can be fraught with risks, including potential disruptions to operations and loss of key personnel. An operator’s involvement can mitigate these risks via a hands-on approach that prioritizes critical functions to ensure they continue without interruption.


As any business owner can attest, employees are the backbone of a small business and their morale and retention are critical. Selling to an operator who values and understands the importance of the existing team can enhance employee confidence and stability. Operators often bring new opportunities for professional development and growth, which can boost employee engagement and loyalty. During our conversations with sellers, references to owners wanting their team to be taken care of are prominent, and rightfully so.


Capable Hands, Continued Success


Selling a small business to an operator is a strategic succession option that offers numerous benefits for owners and their teams. From ensuring business continuity and leveraging a fresh perspective, to preserving the business’s operating cadence and providing sellers with meaningful cash liquidity, this approach addresses many of the concerns and challenges faced by small business owners. By choosing an operator as the successor, owners can confidently transition out of their roles knowing that the business is in capable hands and poised for continued success. 




 

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