In the course of our daily interactions with business owners, we sometimes encounter owners who carry negative connotations of private equity groups, otherwise known as financial buyers. In fact, it is not atypical for business owners to imagine private equity investors as corporate take-over artists, chartering private jets from Manhattan, wearing expensive black suits and ties, chomping at the bit to acquire family-owned companies only to layoff the employees and move the business elsewhere.
This may have been a more realistic picture of private equity groups in the 80s or 90s, but the vast majority of financial buyers today bear no resemblance.
The number of private equity groups in the US has grown dramatically over the last 10-15 years, from a few hundred to a few thousand. Furthermore, the geographic locale of equity groups has grown. A few years ago, you would be hard-pressed to find private equity groups in second-tier cities, as most were concentrated in large hubs like New York, Chicago, Dallas, and Los Angeles. Today, almost every sizable city has multiple private equity groups looking to invest in successful, privately-held companies. I should pause here to reiterate what they are looking to invest in: successful companies.
While a small minority of private equity groups specialize in turnaround investments, most have the opposite criterion. Further, private equity groups look to partner with talented management teams to grow companies exponentially. The notion that financial buyers look to fire employees to cut costs and potentially move the company is rarely accurate. Investors buy companies because they like what the company is doing, and believe that with additional financial and industry resources, they can make company even more successful.
This leads us to the proverbial “second bite of the apple” that you may hear people talk about. When a private equity group buys a company, they typically want to incentivize key personnel to stay with the company and continue performing well. The equity buyer will look to you, the business owner, to reinvest some of your proceeds from sale back into the new company. We have had clients become as little as 5% owners, and as much as 30%. It is no lie that private equity groups look to cash-in on their investments by selling their portfolio companies after holding anytime from 3-10 years. However, this can be a big win for our seller clients as well. In fact, we have seen clients whose “second bite”, with sale of their new minority stake, matched their original proceeds from sale.
Choosing between a private equity buyer and a strategic buyer can be difficult, as owners really need to consider what they desire from sale. Obviously, the economics of any deal are crucial, but our clients also weigh the future direction of the company and opportunities for employees when evaluating the overall dynamics of an offer. Our standard deal produces multiple offers from both financial and strategic buyers, thus allowing our clients to truly make side-by-side comparisons from suitors of multiple shapes and sizes. As a business owner entering the sale process, do not write off equity group suitors because of pre-conceived notions. They can be truly great buyers and partners for future growth.
Michael Rockhold can be reached at 314-991-5150 or firstname.lastname@example.org
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