IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities. Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family owned businesses. The following blog article has been provided by Oliver Kotelnikov. Mr. Kotelnikov is a senior business sale intermediary at IBA (www.ibainc.com):
Demographics & Dynamics of Transaction Facilitation Below $5 Million
Small businesses are often discussed as a single category, but in reality they span an enormous range—from solo operators to companies with several hundred employees. As a result, the language around them has multiplied: nonemployers, employer firms, mom-and-pop shops, Main Street businesses, and lower middle-market companies.
In mergers and acquisitions, the vocabulary becomes even more layered.
But beneath the terminology, the picture is clear.
According to data from the U.S. Census Bureau and the SBA Office of Advocacy, more than 99% of all U.S. businesses fall under the small-business umbrella, representing roughly 36 million companies nationwide. Nearly 30 million operate with no employees, while the population narrows quickly as businesses add staff. Approximately 5.7 million firms employ between 1 and 20 people, and within that group, roughly 3.5 to 3.7 million employ between 1 and 50 people.
Importantly, this group represents the exact segment most buyers ultimately pursue.
These businesses form the quiet bedrock of the American economy. They rarely make headlines, but they are indispensable. Small businesses are often called the backbone of the economy. In truth, they are not just part of it. They are the economy.
A Distinct Asset Class With Its Own Economics
This article focuses on small- to medium-sized businesses that sit above sole proprietors and very small owner-operator shops, and below what is traditionally considered the lower middle market.
These are privately held businesses that typically generate $1–10 million in annual revenue, employ 1–50 people, and trade at $500,000–$5 million in enterprise value.
They are not scaled-down versions of larger companies. They operate under a different set of market conditions.
What they offer is substance. They have real customers, established reputations, solid foundations, and deep ties to their communities. Cash flow is proven. Demand is real. The work gets done.
Ownership is active and visible. Management is lean by design. Decisions are made close to operations. Systems exist where they matter, but experience and judgment still carry weight.
The tradeoffs are equally real. Revenue can fluctuate. Customer concentration may exist. Owner involvement matters. These are not deficiencies. They are the operating realities that create both risk and opportunity.
Because of that, these businesses are priced differently, financed differently, and change hands under assumptions that reflect how they actually run.
Why Buyers and Sellers Keep Missing Each Other
Buyers and sellers often miss each other because they are solving different valuation problems.
Buyers frequently seek the stability and predictability associated with Wall Street-style assets—while pricing those expectations at Main Street levels. Sellers, meanwhile, often underestimate or dismiss the impact that operational risk, owner dependence, and variability have on the fair market value of their business.
The disconnect becomes most visible in how earnings are defined and measured.
Why Deals Break Down After Months of Negotiation
Deals often fail months into negotiations because assumptions and expectations are not clarified at the outset.
In this segment, businesses are typically evaluated using Seller’s Discretionary Earnings (SDE) rather than EBITDA. EBITDA assumes limited owner involvement, professional management, and a degree of operational separation from ownership.
SDE reflects something different. It captures profitability under an active ownership model, aligning valuation with how these businesses are actually operated day to day, adjusting for owner compensation and certain non-recurring and discretionary expenses.
When buyers evaluate an owner-operated business through an EBITDA lens, they often understate available cash flow and overstate risk. When sellers expect valuations based on EBITDA-style multiples, they often overestimate what the market will pay.
Both positions can feel reasonable in isolation. Deals break down when the parties are working from different reference points without realizing it.
Risk, Returns, and How These Businesses Are Priced
Businesses in this segment often generate superior returns on invested capital—commonly in the 20–50% range—outperforming most traditional asset classes.
Those returns exist because buyers are stepping into operational risk and active ownership.
Risk, returns, and valuation move together.
As systems improve, processes mature, management depth increases, and operations stabilize, risk compresses. As risk compresses, returns moderate. As returns moderate, valuations increase.
Tension arises when buyers want Wall Street stability and security at Main Street prices—or when sellers underestimate how much the risk profile of the business influences valuation.
Valuations in this segment are rooted in demonstrated historical performance. While somewhat forward-looking, the market does not pay a premium for unrealized potential or changes new ownership might make.
Net Working Capital: Right Objective, Right Context
Net working capital has become a more prominent—and often confusing—topic in transactions of this size, largely due to concepts and terminology applicable in larger transactions and imported from the middle-market sector.
At its core, working capital represents the balance of short-term operating assets against short-term operating liabilities required to run the business.
In retail and hospitality, working capital is often anchored in inventory and operating supplies that convert to cash daily. In construction, it may involve receivables, payables, and work-in-progress schedules. In manufacturing, it can include raw materials, prepaid expenses, and short-term liabilities tied to production cycles.
Owners should expect to include a normal, average level of working capital in the sale. Buyers need to be realistic and practical about how that figure is defined and calculated for the specific business.
Seller Financing: A Strategic Resource
Seller financing is a resource and a tool, not a liability.
When used thoughtfully, it signals confidence in the business, increases buyer demand, and preserves flexibility in deal structure—particularly in higher-interest-rate environments.
It is commonly used to bridge valuation gaps, address lending constraints, and manage timing differences in proceeds. When combined with bank financing and buyer-injected capital, seller financing can support higher fair market values than cash or bank financing alone.
Structure matters. The amount, term, interest rate, security, and the seller’s position on collateral must be clearly defined.
When structured properly, seller financing aligns incentives, mitigates risk, and supports the long-term health of the business. By spreading a portion of proceeds over time, it can also deliver meaningful long-term tax benefits to sellers.
The Human Side: Presence, Absence, and Alignment
Buyers sometimes approach these businesses as hands-off investment vehicles. That posture sends the wrong message.
These companies reward buyers who stay close to the operation—who learn how the business actually runs, understand its culture, and engage directly with its people and customers.
Active ownership builds real experience, operational credibility, and a track record that carries forward. It opens doors to sustained future growth, larger opportunities, and stronger relationships with lenders and partners.
Sellers recognize this. Many think in terms of succession, not just a transaction. Legacy matters. Sellers are often more than willing to support receptive buyers who are eager to absorb the seller’s knowledge and learn the playbook that made the business successful. Time spent in the trenches is rarely a barrier; it is often the foundation of a smoother transition and a stronger next chapter.
The question why are you selling matters, but it is transactional. The question why did you start it is different. It is personal, and it invites an honest conversation about what’s next and why.
In a market where buyers far outnumber available quality businesses, rapport is not a soft skill. It is a competitive advantage. Buyers who honor what was built—and the people connected to it—stand out.
More than most parts of the market, this segment requires a collaborative approach.
Successful outcomes are built when buyers and sellers are aligned on what the business is, how it works, and what must be preserved as it changes hands.
This is how enduring Main Street businesses move from one chapter to the next.
That is the quiet engine of America.
If you have questions relating to the content of this article or the process associated with selling or buying a company, Oliver Kotelnikov would welcome the opportunity to talk with you. Mr. Kotelnikov can be reached at (206) 776-1161 or oliver@ibainc.com.
IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, and real estate communities on subjects relevant to the purchase & sale of privately held companies and family owned businesses. IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.