Thinking of Exiting? Finding the Right Buyer Is the Key to Small Business M&A

Set-Aside Alert

By Scott E. Semple, Senior Advisor & Sharon B. Heaton, Founder & CEO, sbLiftOff

Selling your company is a life-changing event. Successfully selling your business requires deft coordination among legal, financial, HR, and other domain experts to smoothly navigate from due diligence to closure. But for most sellers, one question always rises to the top: Who’s the buyer taking over my legacy? In this months’ discussion of M&A issues for small and set-aside businesses we discuss Finding the Right Buyer.

Strategic vs. Financial Buyers

Most small business owners considering an exit want to sell to a “strategic” buyer. While there are benefits, (strategics know your industry, and might pay more than a “financial buyer”), the problem with a strategic is that they are a competitor. This means you will be providing confidential information to a direct rival for a deal that may not close. Sellers need to enter these negotiations with eyes wide open.

Financial buyers, on the other hand, are far less likely to benefit from this same information, as they are not competitors or players in the same industry. A financial buyer will most likely be buying your business to enter the small business market or expand into your niche within the set-aside sector.

With any type of potential buyer, protecting your interests and guarding your secrets is paramount.

Set-Aside Requirements in M&A Transactions

Finding the right buyer for firms with a significant pipeline and backlog of federal set-aside award revenue may require additional considerations to ensure full compliance with all applicable SBA category regulations. Finding a buyer that meets these added qualifications can restrict the pool of available buyers, the conventional thinking goes, and thus burdens the selling process. But is finding the right buyer for a set-aside firm really so difficult?  A quick review of the numbers says it shouldn’t be.

If you are a women-owned small business (WOSB) you are among 9.9 million WOSB firms1. Service-disabled veteran-owned small business? There are 2.5 million firms with that status in the U.S. today1. And most of these firms can be eligible buyers of a firm that is active in the federal set-aside market. This suggests that the available pool of eligible buyers is anything but limited. Your knowledge of and revenue in a federal small business category is in fact a blessing and can bring the right buyer to your door. It’s worth investing the time to understand the advisors (banks, M&A firms, law firms) that specialize in set-asides and other unique market sectors. It’s also worth attending the conferences and trade shows where these firms are speakers, sponsors, and exhibitors. They are there to help you find the right buyer.

HUBZone (around 7,700 firms1) and 8a (around 9,000 firms1) represent much smaller available pools of qualified buyers, which will narrow your search. But the same rules apply: Invest the time to know the pool of available buyers and remember that all the data on these firms is free and available on

Make sure to study and get solid advice regarding the impact of affiliation rules and SBA set-aside policy language. This dictates how and when revenue of two merged firms is counted against the SBA size standards. One plus one does not always equal two. The rules for combining revenue and/or headcount–past and current–that counts towards the five-year averages and totals need to be evaluated carefully to understand if the transaction will result in the right buyer. The guidance you need is out there. You just need to find it.

Ensuring Contract Continuity

In most set-aside transactions, the right buyer is a company or an individual that can fully qualify to recertify under the categories of the acquired contracts. But what if the right buyer doesn’t qualify for your set-asides? A buyer typically doesn’t lose the sellers’ contracts even if the after-acquisition entity no longer qualifies for the set-aside. But in most cases, the buyer will not be able to recompete for new awards within that category. A thorough review of existing revenue streams along with the qualifications of the potential buyer is the key determinant of the value of the current pipeline and backlog, and often requires the insight of a skilled financial team to ensure you get the benefit of all the revenue you are selling.

Finding the right buyer for a set-aside small business is a combination of good homework on your part and good advice from a professional with a demonstrated track record in small business transactions. We are here to help – please contact us with questions about your dreams and desire to lift off to your future!

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