The Chamber of Commerce estimates there are over 33 million small to medium-sized (SMB) businesses in America, with over $10 trillion held by baby boomer owners. Every day, it’s estimated that 10,000 of these baby boomers who own over 6 million SMBs are retiring.
This large retirement wave and its impacts on retirees’ businesses are referred to as the “silver tsunami,” and it represents a vast pool of equity value that will either be forced to liquidate as owners shut down their businesses or will be transferred to new owners as business owners sell to professional investors or owner-operators.
The Silver Tsunami represents an attractive investment opportunity for investors to generate strong returns while backing the next generation of local owner-operators as they acquire and run these businesses.
Diversifying your portfolio into SMB acquisitions
Investing in small businesses is a unique opportunity to diversify your portfolio and deliver uncorrelated returns to the public stock market and other alternatives.
Through deal-by-deal or fund opportunities, you can gain exposure to the equity value and cash distributions generated by the small businesses that power Main Street America.
Key investment benefits of investing in SMB acquisitions
SMB acquisitions are attractive investment opportunities for several reasons.
First, investors can typically invest at a price between 3-5x the company’s earnings (in this case, EBITDA). EBITDA multiples are typically much lower than average stock market price-to-earnings (P/E) multiples of 20-25x. This means investors are buying a greater proportion of the company’s earnings with their investment.
Second, most deals available to investors on Mainshares are structured with significant debt as part of the acquisition financing. Using high leverage on a deal—typically anywhere between 70% and 90% of the purchase price—can boost investor cash-on-cash returns and speed up the time it takes to return investor capital.
Lastly, investing in SMBs provides investors with financial returns through realized appreciation when the business is sold and income from cash distributions. These companies typically have positive free cash flow and make investor distributions, with the goal of returning capital within 3-5 years. They do this by offering a preferred return — typically between 10-12% — and repaying investor capital before anything else. Once investor capital is returned, investors enjoy a step-up, which offers a sweetener to the deal, giving investors a 1.5-2.0x greater share of future distributions than their pro-rata equity ownership.
Small business impact on local communities
Not only can investors earn attractive financial returns, but they can also meaningfully benefit the local communities of small businesses. By funding the gap equity for local owner-operators to acquire small businesses, investors can help keep communities run by their residents, employ other community members, and give back through volunteer and non-profit programs — all critical components for healthy, thriving communities.
Investing in SMB acquisitions today
Luckily, investing in SMBs has never been easier. Accredited investors can access high-quality deal flow with a click of a button and build their own portfolios of small businesses from around the country.
Passive investment options for accredited investors
Today, there are two main ways to invest in SMB acquisitions, each with distinct benefits: deal-by-deal and funds.
Deal-by-deal investing allows investors to select individual SMB investment opportunities based on their industry, geographical, and deal structure preferences. This approach enables investors to customize their portfolios and avoid fees charged by third-party professional fund managers by investing directly in a special purpose vehicle (SPV) for the deal.
On the other hand, funds pool capital to invest in multiple businesses, enabling investors to spread their investments across many opportunities with a single check. This reduces risk through diversification. Fund investors enjoy the benefits of allowing a professional investor to invest their capital according to their investing thesis.
Technological progress for passive SMB investors
One of the biggest barriers to entry for investors in the past has been sourcing and managing their SMB investments.
Today, Mainshares enables investors to create an account, view deal information, and build relationships with operators from a seamless dashboard. With increased levels of standardization across offerings on our platform and a suite of tools to manage their portfolios, Mainshares lowers the barrier to entry for new SMB investors to make informed investment decisions and stay updated on their portfolios' performance.
Investing in SMB acquisitions: what we know
Small businesses are the backbone of Main Street America, totaling over 99% of all private businesses in the U.S. and employing nearly ~50% of private sector employees.
With the vast majority of these changing hands over the next decade, it’s never been more critical to invest in the future of small businesses and keep them in the hands of their local communities.
Investors can now access these lucrative investment opportunities and diversify their portfolios into attractive assets using new technology and legal structures.
If you’re ready to get started, sign up for Mainshares today and view our newest opportunities.
Information posted on this page is not intended to be, and should not be construed as tax, legal, investment or accounting advice. You should consult your own tax, legal, investment and accounting advisors before engaging in any transaction.
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