The Operator Gap
Experienced small business (SMB) owners understand the importance of having a strong team in place to manage daily operations. For many small businesses, the owner plays a key role on the operating team, helping lead the vision for the organization and executing that vision on a day-to-day basis. While this configuration is typically a net positive for the health of the business, it can be particularly challenging for buyers in the small business acquisition world.
When acquisition entrepreneurs look to buy multiple companies, they are not able to provide the same level of operational support as the prior owner. Instead, they require experienced and talented operators to help achieve their growth goals efficiently and successfully. As the SMB acquisitions space grows, the need for strong operators, and not just dealmakers, will continue.
Hiring Operators for Small Business Search Expansion
Because our industry has traditionally been dominated by graduates of top MBA programs with private equity backgrounds, we tend to see a large number of acquisition entrepreneurs with substantial skills when it comes to identifying and structuring deals and less experience when it comes to managing a small business. One popular SMB acquisition strategy relies on buying multiple small businesses as part of large holding companies. A holding company, or holdco, owns controlling shares in other companies or subsidiaries, which enables it to manage and control those entities while maintaining their independence.
The expansion through holding companies can take different forms: horizontally (geographically) or by vertically integrating supply chain components. When executed successfully, building a holding company is a potentially lucrative strategy that allows buyers with dealmaking backgrounds to take full advantage of their experience. At their best, holdcos help business owners consolidate operations, reduce costs, and increase revenue. Moreover, when holdco owners are ready to sell, they can receive higher valuations for their businesses due to economies of scale and the potential for future growth.
However, holdco executives sacrifice control for scale, which makes hiring decisions exceptionally important. Without the right operators in place, individual acquisitions and business lines may struggle due to the lack of leadership, especially if the prior owner had been heavily involved in day-to-day management and decision making. Additionally, we’ve seen evidence that acquisition entrepreneurs who do not plan to operate the businesses they buy can struggle to raise investor funds without being able to identify a clear vision for the value they’re adding to the transaction.
Bridging the Operator Gap
The most efficient way for a holdco executive to ensure their companies have the appropriate operating support is to identify that support prior to the acquisition. This can come via internal partnership, as with Canekast, where the acquiring team has a designated operations expert. Holdco owners without a skilled operator on their team can benefit from assessing their target company’s pool of existing operating talent during the due diligence process. It’s possible that an existing manager at the company is a strong fit for a larger leadership role.
Externally, online search portals like Searchfunder can connect entrepreneurs with investors looking for operating partners, which can help bridge the operator gap for SMB buyers. Additionally, accelerators such as those listed on SME Ventures can provide training and resources for new operators, enabling them to acquire the skills they need to manage small businesses effectively.
Furthermore, new initiatives like Operator Collective can provide resources designed specifically for operators who are interested in joining early-stage startups as founders or executives. This approach can help attract new talent to the small business sector, providing a more diverse pool of operators for holdcos and small business owners to choose from. In the future, at Private Market Labs, we will help bridge the operator gap within these transactions as well (stay tuned)!
In conclusion, the operator gap presents a significant challenge for small business owners and baby boomers looking to exit their businesses, but it also presents an opportunity for the holdco strategy to thrive. Expanding access to more searchers beyond MBA programs can help bring more operations-focused entrepreneurs to the industry, enabling the success of small businesses and holdcos alike. By promoting the development of skilled operators, we can ensure a more prosperous future for the small business sector.