But this article is not so much about managing small companies, rather about doing transactions with small companies, whether raising equity or selling the company or, as will be discussed below, merging two small companies. It is also much more difficult to do transactions with smaller companies than with larger companies, for the following reasons:
- The greater difficulty of managing small companies, as explained above, makes them higher risk, and hence less desirable, to investors.
- Ironically, it is often easier to find buyers for larger companies than for smaller companies. Strategic investors and private equity firms prefer targets that “move the needle”, that have a certain critical mass. In my experience, usually this threshold kicks in at a transaction valuation in the range of 10 million euros or dollars.
- It takes just as much time and effort, sometimes more, to buy or sell a company valued at EUR 2 million than a company valued at EUR 20 million.
- As an owner of a small company (say EUR 1-2 million revenues), it is often difficult to afford an experienced law firm for a transaction, let alone a good financial advisor, who might be used to earning a success fee of several hundred thousand euros.
- For buyers, investing in a small company, that often has a very “thin” management team, can be a high-risk proposition. If one or more members of such a thin management team leave, or turn out not to meet expectations, the entire investment may be at risk.
- Small companies often lack audited statements, or any kind of management accounting.
- In any transaction involving a smaller company, it is often challenging to obtain timely and quality information, due to lack of systems, specialized staff (such as a controller), etc. This can cause enormous strain on the management team of a small company, as well as in the negotiations between the parties.
- First, growing the company organically to a larger size, so long as that growth can be done profitably and without endangering the financial health of the company, might be one approach.
- Acquiring other companies might be another way of growing—obviously, the acquisitions should be value accretive rather than diminishing value.
- Merger is another option to increase size. This is an option which is perhaps not applied as often as it might be. It is entirely possible to merge two smaller loss-making companies and create one profitable larger company. This requires careful financial engineering, and a good mix of management skills and human resources.
- Qualitatively improving the small company, to have it run more like a large company (e.g. with a high quality management team, better systems, better corporate governance) can help at least partially to dig the company out of the trap.
In a nutshell, doing a first transaction with a small company can be even more challenging than managing a small company. Finding expert legal and financial assistance, that is capable of working within the budgetary constraints, is also an important ingredient to success.
Most owners will typically attempt such a transaction themselves, with assistance of legal counsel. Often it ends up being a “learning experience” rather than a successfully closed transaction.