NEWSLETTER, Vol. 1, No. 1, March 2007

The Looming Management Gap in Small Business America
By Robert Befidi, Jr. and Mark R. Sinatra

When most people think of the issues facing the baby boomer generation, the ones that come to mind tend to revolve around healthcare, social security and retirement. Far down the list, and perhaps on the radar of only a few, is the management gap that many boomers face as they make plans to hand over their small businesses to equally capable hands.

During the last 30 years, 5 million businesses with annual revenues ranging from $1 million to $75 million were founded, and it is estimated that the baby boomer generation fueled much of that growth. As the owners of these businesses approach retirement, some are faced with the challenge of finding ideal successors or appropriate buyers who will maintain their legacy and pick up where they left off with managing and growing the companies they founded. These goals are not always complementary and may pose a succession planning dilemma.

This is no small issue, especially when one considers that, according to the federal government, small businesses generated more than 70 percent of the U.S. domestic jobs created in the last decade. With approximately 40 percent of all family-owned businesses poised for a smooth transition of control to the next generation, the continued prosperity of scores of businesses and their employees will depend on actions taken by business acquirers. Broadly categorized as Strategic Buyers (i.e. large corporations) or as Financial Buyers (i.e. private equity funds), the activities of business acquirers helped produce a record $1,565 billion of mergers and acquisitions deal value in 2006, up 35.7 percent from 2005 and forecasted to grow even further in 2007.

Although strategic and financial buyers have been known for providing good liquidity events for small business owners, their offerings have typically included highly constraining provisions with respect to management tenure, deal structure, and near term operational strategy. With an emphasis on flexibility, a hybrid form of financial buyers, known as Search Funds, have emerged during the last 20 years. Typically known for their speed of execution, these sponsored buyers are management buyout teams backed by experienced financial investors and operators that aim to provide small business owners with the best of both worlds, namely, instant liquidity and managerial expertise with a focus on maintaining the culture and identity of the acquired entity, while preserving the founder’s legacy. In addition, these sponsored buyers apply their experience, perspective and energy to actively create sustainable value in the acquired enterprise. The table below highlights some of the key differentiators between Search Funds and mainstream Strategic and Financial Buyers.


What does this mean for the elderly baby boomers who are evaluating their liquidity and succession strategy? These business owners need to carefully evaluate the trade-offs associated with each type of buyer as they consider their exit options. The looming gap in the management of small businesses requires immediate action to preserve the vitality of this important part of the U.S. economy.

About Gordian Capital: Gordian Capital LLC (“Gordian”) is a private investment firm that seeks to acquire and actively operate a privately-held company with revenues of $5-$50 million located in the U.S. or Canada. Gordian is unique in that its managers will assume senior management responsibility of the acquired company; thereby offering an ideal exit opportunity for owners who seek to partially or fully remove themselves from day-to-day operations. Gordian’s primary objective is to continue the long-term growth of the acquired company, while ensuring that the owner’s legacy and employees’ welfare are maintained.

To learn more about Gordian, please visit www.gordiancapital.com

Please feel free to contact us to learn more about Gordian Capital, LLC or to discuss a specific investment opportunity. We pay industry-standard fees for referrals that lead to the closing of a transaction. All material is kept strictly confidential and returned upon request. We will review and provide feedback for all opportunities we receive in a timely manner; generally within one business week.

Robert Befidi, Jr.
Managing Director
Direct: (646) 620-1552
Email:   robert@gordiancapital.com

Mark R. Sinatra
Managing Director
Direct: (646) 620-2054
Email:   mark@gordiancapital.com


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