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Too small for private equity
Aging owners
Those companies typically have owners who are roughly baby boom aged and want to move on with their life and do other things. There is no obvious, easy path to selling to private equity, because the companies are too small for it. Purchase prices run perhaps six or seven times cash flow, so the transactions are small.
Why private equity skips them
A private equity firm can't scale and grow by investing at that bite size, so the segment inherently doesn't scale easily. That structural inefficiency is likely to persist and keep returns attractive for those who participate, and a trace of cottage industry is likely to remain in its DNA for some time.
A growing supply
The number of these companies is growing and roughly tracks the aging of the population, a secular trend that is very powerful. As the number of searches grows, the supply keeps growing with it. So far there is no sign of supply and demand getting disconnected in a way that would dramatically affect pricing.
Why are so many owners reaching retirement together?
People born from 1946 to 1964 are counted as baby boomers, a generation born in an unusually high-birth period after the Second World War. Owners who founded businesses decades ago are now reaching typical retirement ages in large numbers. A sale or a handoff to a successor are the main routes out of ownership. The oldest boomers turned 65 in 2011, and the youngest turn 65 in 2029.
Why do smaller companies sell for lower multiples?
Small businesses tend to depend on one owner, a handful of customers, and a thin layer of managers, so buyers see more risk and pay less per dollar of cash flow. A buyer cannot easily spread that risk across many customers or many managers. Pepperdine University's Private Capital Markets Report has tracked this size effect in deal multiples for years.