There are a substantial number of small-cap market companies in the United States as well as off-shore. Many were founded several decades ago and now the owners or their children want to liquefy their holdings. Some expect to cash out completely while others plan to sell a portion for company cash needs. Unfortunately, for these owners and managers, small companies do not necessarily enjoy the liquidity and ready access to the capital markets that their larger counterparts do. Fewer buyers are interested in these smaller transactions and many of these companies are managed in ways that make them less attractive to outside investors. Commercial bank financing is usually available to small concerns in limited amounts, but it often requires the personal guarantee of the principals. As a result, companies of this size must rely chiefly on their owner’s capital to support their growth and make acquisitions or capital expenditures. This dependence frequently conflicts with the principals’ desire to take capital out of the business after many years of investing.
A number of internal factors can also affect the value of small companies. Because of their size, they may lack strong financial controls and information systems, depth of management and geographical reach. Their status as Sub S corporations, while beneficial in terms of tax treatment, may mean they do not have standard cost systems or books that conform to generally accepted accounting principles. Moreover, the principals may be hesitant to assume the additional risks of making acquisitions, adding product lines, expanding production capacity or investing in capital equipment and systems.