Consider Private Equity Investors as Buyers

by Tyler Carlson

A private equity buyer could be the right choice when selling your business. Discover how perceptions are changing as we shed light on common misconceptions about private equity investors.

Many business owners have a stigma, probably from the 1980s, that private equity investors destroy companies and eliminate jobs, primarily due to takeover tactics and rightsizing strategies designed to maximize profits for investors in a leveraged buyout (LBO). An LBO is an acquisition of a business funded using a significant amount of debt and with the remaining portion funded through an equity contribution.

During the 1980s, private equity investors would take out large amounts of debt (85% to 95%) and leverage the acquired company. In the 1990s and 2000s, private equity re-emerged with a new degree of legitimacy and respectability and focused on making buyouts attractive propositions for management and shareholders. Recently, GF Data reports that from the years 2014 to 2018, private equity investors used an average debt level of 55.7% when purchasing private companies between $10 million and $250 million.

A traditional private equity firm holds its investment for three to five years and then exits the company. During the hold period, the private equity group is focused on increasing excess cash flow to pay down debt and further grow the business.

The target return for a private equity investor is typically between 15% and 25%. However, over the years private equity investors have become increasingly focused on the long-term development of companies they acquire. Additionally, private equity firms are more likely to make investments in capital expenditures and provide incentives for management to build long-term value. Based on data from the American Investment Council, private equity firms focus on:

  • Investment in companies — Make annual investments of hundreds of billions of dollars in thousands of companies to make improvements and promote growth.
  • Improving communities — Work to grow or turn around businesses and ultimately improve communities across America.
  • Creating jobs — Support millions of American workers in all industrial sectors.
  • Strengthening retirements — Provide the highest long-term returns, net of fees, to pension funds, endowments and other institutional investors.

In Wisconsin alone from 2012 to 2017, private equity firms have backed 410 companies, employed 50,000 people and invested $47 billion, according to research conducted by the American Investment Council. Also, Preqin indicated that as of September 2018, private equity groups have $1.4 trillion available for investment globally, which makes them very inquisitive and legitimate buyers.

Don’t fear private equity

Consider private equity a good potential buyer for your business. During an auction process to sell your business, we create a private capital market between strategic and financial buyers (i.e., private equity groups) to maximize value, terms and options. During this process we market to both corporations and private equity groups, which could either be a pure financial or a strategic buyer, if they own a portfolio company in the space. Private equity groups could be great buyers if you want to keep most or all of your key management in place and provide the option for management to become minority owners.

Additionally, private equity groups assist in professionalizing the business and typically invest in technology (e.g., better CRM, ERP, accounting systems) to improve efficiencies and gain greater insights into the business. Furthermore, private equity groups are very experienced at getting deals done and in many cases have better processes than most corporations, because private equity groups are buying five to 10 companies per year, compared to corporations that might buy one or two per year.

What makes a company attractive to private equity investment?

  • Strong, predictable operating cash flows
  • Niche and defensive industry characteristics
  • High-quality management team looking to stay on and grow the business post-close
  • Immediate opportunities for growth or improvements to operations
  • Leading market position and/or strong brands
  • Potential synergies with other portfolio companies (e.g., sales channels, product expansion, operations improvements)
  • Limited capital expenditures or product development requirements

Overcoming the myth of private equity

Additionally, many people believe that private equity typically comes into a business and immediately cuts costs (e.g., laying people off and reducing compensation). However, most private equity groups truly value the human capital portion of a company and don’t want to eliminate jobs. Their whole objective is to grow the business and while they do have a strong emphasis on profits, they realize the true value of people and their contributions to the company.

We are not saying that private equity doesn’t review duplicative-type roles and adjust accordingly, but from our experience, private equity groups keep the team post-close and in many cases provide employees with greater opportunities than under previous ownership. For all of these reasons, we believe including private equity groups in a board auction process provides you, the owner, with the most options and gives us the most negotiating leverage to meet your desired objects.

Contact us with questions or for help determining if private equity should be considered as a buyer for your business during the sales process.