Know Your Target Market (Fishing vs. Hunting)

Which is the right way to sell your company: using a fishing rod or a rifle?

Selling a business with a fishing rod involves casting a line, dropping the lure, and waiting. In the real world, this involves confidentially marketing your business for sale using various media: online media, trade publications, newspapers, and others. This is a passive approach, in which you place the advertisement, then sit and wait (visualize your average fisherman patiently waiting).

Selling a business with a rifle, on the other hand, involves knowing exactly who your targets are, hunting them down, confronting them directly, and firing an accurate shot right where you need to. Selling a business with a rifle is an active, involved process (think costlier and more time-consuming) that requires planning, discipline, accuracy and stealth (confidentiality).

In some cases, you can use both. Note that you also tend to fish for smaller creatures (e.g., bass, salmon, tuna, crappie, trout), while you hunt for larger creatures (e.g., deer, elk, bison, moose). This is the same in the business world.


“Fishing” is for small businesses; “hunting” is for mid-sized businesses

Let me first define a small business and a mid-sized business:

  • Small business - Annual revenue: less than $10 million; annual cash flow/profit: less than $1 million

  • Mid-sized business - Annual revenue: $10 million to $100 million; annual cash flow/profit: $1 million to $10 million


Who buys small businesses?

In determining a marketing strategy for selling your company, you must first define your target market. Small businesses are predominantly purchased by individuals (about 95% to 99% of the time) and not commonly acquired by companies (about 1% to 5% of the time).

Next, you must figure out the most efficient way to contact these individuals. Do you go door to door or randomly stop people on the street to ask if they want to buy a business (hunting)? Or, is it more effective to advertise your business for sale in a form of targeted media (this is the body of water, lake, or ocean you choose to fish in) that reaches individuals who are actively looking for businesses to buy?

Because the target market for small businesses is primarily individuals, the most efficient and cost-effective method of contacting those buyers is through targeted forms of media, in which those individuals have identified themselves as potential buyers of businesses. In other words, this group of people has already been corralled for you, thus making the process more efficient, and therefore cost-effective.

Be particularly wary of smaller companies with revenue of less than $10 million per year that contact you. Unlike what most people believe, smaller companies do not actively acquire other companies. Why? Well, they are too busy putting out fires and chasing the next big customer to be proactive enough to create a team focused on developing and executing an acquisition strategy.

Approach only those targets that are ready, willing, and able to take action. You will know this by researching the company and determining how many acquisitions it has made in the past one to five years. The more acquisitions or companies it has purchased recently, the more likely that it will buy another company.

An overwhelming majority of smaller companies are not ready, willing and able to spend hundreds of thousands or millions of dollars to purchase a competitor. Of course, there are exceptions, but in general, only mid-sized and larger companies grow through acquisitions.

Smaller companies typically grow organically — by slowly increasing their marketing and advertising budgets. Most of them are in a state of disorganized chaos, busy chasing the next big deal or new big customer and do not have large cash reserves to pursue acquisitions as a growth strategy. Attempting to sell your business to smaller companies is, therefore, an ineffective strategy that can waste an enormous amount of time.

Key Points

  • Selling a business can be like fishing where you cast a line, drop the lure, and wait, or it can be like hunting, which involves hunting your buyers down and aggressively targeting them. 

  • Selling a business is most often like fishing and requires a lot of patience. “Fishing” in small business sales works best for small businesses with an annual revenue of less than $10 million.

  • Individuals are more likely to purchase small businesses. Companies are more likely to purchase mid-sized businesses.

  • Unprofitable businesses and those with less than $100,000 in annual SDE take longer to sell.



Larger companies and business deals: “Size does matter”

Again, the primary criterion larger companies use to determine if an acquisition makes sense is annual profitability, cash flow or EBITDA. These companies are looking for a minimum annual cash flow or profitability, also called EBITDA, of $1 million to over $10 million.

Why? The answer is simple — it takes just as much time to do a $1-million deal as it does to do a $25-million deal. Also, the professional fees involved in the acquisitions are similar (just slightly higher for larger deals), regardless of the size of the deal. The percentage of fees, therefore, decreases as the deal size increases.

For example, a $1-million deal may command fees and expenses of $100,000 or more (10% of the deal size), while a $25-million transaction may command fees of $150,000 to $300,000 (0.6% to 1.2%). This means that the percentage of fees and expenses decreases as the size of the deal increases. Doing larger deals is, therefore, more cost-effective.

A company must invest in 25 businesses — each having a cash flow of at least $1 million per year — to have the same impact as buying a single company with an annual cash flow of $25 million. So buying larger companies is more efficient, both from a cost and time perspective.