As we face the current uncertain economy, it’s easy for the business family that has all of its eggs in that one business “basket” to feel nervous. However, there are real alternatives today that simply weren’t there 10 years ago. There is a category of business buyers – the “equity fund” buyer – which, although it has been around for many years, has finally, this century, become a true competitive buyer for the middle market company.
Our firm sells privately held mid-sized companies – commonly ranging in size from $10 million to $250 million in sales. We have been doing that for the past 18 years. Only in about the last 5 years have equity funds started winning our deals!
There has been a veritable explosion in the number of equity fund buyers recently. Our private database of qualified equity funds is now over 2,500. Additionally, they are pricing their purchases today to compete with strategic buyers. Ten years ago our sellers ended up being sold to private equity funds in maybe 1 in 10 deals. Today, it’s more like half of all deals in this size segment.
The private equity fund also offers some twists in form and content which, depending on your circumstances, can be quite appealing to the family business owner.
Management stays in place – The private equity funds want management, and even most long time shareholders, to stay involved with the company. They hope such historically important key people can be part of the company’s future, and its growth. Private equity funds don’t have a stable of industry experts or other employees which they can move in to replace your people. If you enjoy your business, but need capital for growth, or simply want to reduce your risk by taking a few chips off of the table – they can offer you a great way to do it!
Financial incentive for future growth – The typical equity fund likes to leave anywhere from 10% to about a third of ownership in the hands of former shareholders and/or employees. This leaves some of the key operating management with a strong incentive to continue to nourish and support the company. In just a handful of years, we have seen a number of these smaller minority retained pieces become almost as large in value as the original super-majority sold! If you are optimistic about your company’s future – particularly if your company gets a bit more capital and some sophisticated advisory guidance, this can be a great way to direct your future.
Evolving job roles for senior executives (having more fun) – We also see a great many owner executives who are excellent at certain aspects of their business, but not at everything. It’s those weak spots that haunt owners and keep them up at night, and they can be the hardest areas for that owner to mend or to develop beyond. For example, the owner who is a natural born people-person – a great boss, and a good salesman – may be weak in financial control issues, or administrative function (that’s not his natural gift, or his personal preference). Post sale to an equity fund, he has assistance in getting top quality people in place for those jobs – and he becomes free to once again do what he’s great at. (Win/ win, for both the seller and the equity fund).
In spite of all of these supportive and complimentary comments about private equity funds, they are difficult to deal with for private company sale in a few ways.
The “con’s” of equity fund buyers – Equity funds know less about your industry, and yet can be very aggressive, in the heat of competition for the deal, in trying to get you very quickly “committed” to them. They ask for an exclusivity agreement, requiring you to agree not to talk to other buyers. All too often they may rush you to that step, before they have evaluated fully. If that causes them later to “back out,” or to propose major changes to the deal,that can cause you as Seller to have to back away and start the entire process over. The cost to the seller of a failed effort is enormous – both in terms of professional service and support, but more importantly, in terms of lost alternative buyers. Equity funds also depend heavily on bank backing, they require greater access to employees pre-closing (even requiring advance contracts in some cases), and they move more slowly than the average “strategic” buyer. Some equity funds are far better than others with respect to such negatives, and a strong intermediary can help you evaluate, control the process, and hopefully sort these things out.
In summary, equity groups are a complex and sometimes difficult group to court as prospective buyers, but it’s also a group that can offer a whole new range of potential solutions for the private business owner who wishes to reduce risk.