What is Micro Private Equity? An In-Depth Guide for Entrepreneurs

Are you eager to know the answer to “What Is Micro-Private Equity?”? Well, you will find the answer to that in this article!

As a consultant who has advised over 100 small and medium businesses on capital raising, I often get asked about micro-PE by entrepreneurs looking to exit.

So in this comprehensive guide, I‘ll cover everything you need to know about this emerging asset class from the perspective of a business owner.

How Micro-PE Differs from Entrepreneurship and Angel Investing

Micro-PE investors are not founders starting something new. They acquire control of existing small businesses from founders looking to exit.

Unlike angel investing which is more passive, micro-PE takes a hands-on role in managing and growing the business.

Type Role Approach
Entrepreneur Founder Build from scratch
Angel Investor Passive Investor Provide capital to grow
Micro-PE Investor Owner-Operator Acquire & boost value

Micro-PE targets proven companies, even if small or niche. For example, a local restaurant with $750K in annual sales and $150K of owner earnings could be an ideal candidate.

Average deal size in 2020 was $2.8M, with over 65% under $5M valuation. Industries spanned consumer products, software, manufacturing, services, healthcare, and more.

What‘s Fueling the Growth of Micro-PE?

Two big trends have enabled this asset class to boom in recent years:

  1. Marketplace Liquidity: Platforms like MicroAcquire and FE International connect buyers and sellers for internet businesses globally. Over $1B in small tech deals in 2021 alone!
  2. Tech-Enabled Small Biz Models: Software and ecommerce companies can scale rapidly with relatively little capital. High margins and digitally native models are catnip to sophisticated investors who can turbocharge growth.

This enhanced transparency and connectivity has allowed financial buyers focused purely on cash flows + operations rather than industry veterans to enter the space.

Who Might Be Interested in Micro-PE Investing?

While any individual or firm with sufficient capital can pursue micro-PE, it tends to attract those who can add strategic value:

  • Serial Entrepreneurs: Leverage prior scaling experience to expand distribution channels, penetrate new segments
  • Technical Founders: Optimize code architecture, implement analytics + customization to boost product-market fit
  • Marketing Gurus: Apply digital acquisition strategies, funnel optimization tactics to reduce CAC
  • Finance Whizzes: Streamline workflows, improve reporting for faster decision making

For the right buyer, micro-PE can be more profitable on a risk-adjusted basis than traditional early stage investing in nascent startups.

Micro-PE In Action

Let‘s walk through a real-world example from one of my clients.

Sara was the founder of Local Produce, a specialty grocery delivery business doing $1.2M in revenue with 30% EBITDA margins. After 5 years of growth, she was feeling burnt out but still loved the idea and wanted it to thrive under new ownership.

She had several potential acquirers propose offers:

  • A national grocery chain offered $3M valuation
  • A competing local grocery bid $2.5M
  • A Micro-PE investor named Matt offered $2M

The chain would likely rebrand and integrate it. The competitor would absorb customers but eliminate redundancies. Matt however saw room to boost margins through vertical integration, and potential to expand to multiple cities reusing the tech stack.

He also brought digital marketing expertise to help manage rising customer acquisition costs in the grocery delivery space. His experience winning hyper-competitive keywords would help defend against multi-billion dollar ultra-fast delivery upstarts.

By optimizing costs and demonstrating path to multi-city expansion, Matt was able to resell Local Produce just 2 years later for $10M, a 5X return on his initial investment even after paying off Sara!

Key Due Diligence Areas in Micro-PE Deals

While every company is unique, I advise my clients pursuing micro-PE buys to dig into these key areas:

  • Customer Concentration: Ensure revenue is diversified, with no single large client driving >30% of revenue.
  • Online Reputation: 95% of consumers read online reviews before visiting small businesses – evaluate sentiment.
  • Personnel Risk: Factor in costs of replacing founder-CEO‘s operational involvement.
  • Growth Trajectory: At minimum history of 10-20% annual top line growth.
  • Accounts Receivable: Review if booked revenue matches cash receipts.

Validating financial health, scalability potential, and sustainable competitive advantages early on is crucial.

Final Thoughts on Micro-PE

Hopefully this guide has improved your understanding if micro-PE is a good fit for your small business ambitions. As an owner getting approached by financial buyers is a high-class problem in a world where raising growth capital from traditional VCs rarely aligns with lean bootstrapped companies.

By offering another flavor of liquidity and leveraging external operational help, this "small money" offshoot of private equity investing is rapidly moving mainstream. We‘re still early innings, so expect ever increasing activity!

Let me know in the comments if you have any other micro-PE questions. Happy to shed more light on this growing asset class.