Private Equity Groups

What is a Private Equity Group?

A private equity group is an investment firm that pools capital from limited partners (LPs). "Private equity" is a very broad category that can include anything from family offices with $10m in assets under management (AUM) to $100B+ megafunds, all the way to international investment firms like Blackrock and even the sovereign wealth funds of entire countries. As a small business owner, you only need to worry about micro and mid-market PE firms with <$500M in AUM.

PEGs typically employ one of several strategies when making an acquisition - it's important to know what a PEG's objectives are before making a deal, so you can understand what it means for your transition timeline, your employees, and your clients.

Platform

A platform strategy is pursued by PEGs to acquire an already successful business and grow it through consolidation. First, the firm acquires a company to anchor the platform around, usually one that's already a market leader or in the #2/#3 position. Then it will look for smaller competitors to acquire and merge into the platform as "add-ons". This involves dissolving the company's identity, reducing redundant headcount in the add-on company, and migrating customers over to the services offered by the platform which may or may not suit their needs as well as the original company.

Roll-up

Rather than starting with a single platform company, a roll-up strategy involves buying multiple smaller businesses in a fragmented industry and merging them into a single entity. This way, the PEG can reduce redundant headcount and equipment costs while preserving the same customer base and revenue.

Growth Equity

PEGs may offer to purchase a minority stake in the business to provide capital necessary for you to grow your business. This can be a great way to raise capital for expansion when debt is not readily available, but always consult your accountant and financial advisor before moving forward with any investment.

Selling your business to a PEG

Compared to other buyers types, private equity groups are very common. Most small business owners with more than $1m per year in profit will be fielding inquiries from PEGs on a weekly basis. There are some tradeoffs to consider when deciding if a PEG is the right home for the company you've built.

Business Types

There are many PEGs in the US, and as a result there's a PEG for almost every industry and geographic region you can imagine. For example, this one has a focus on CPG and packaging companies in the midwest. Most businesses with more than $1m in net profits will be able to find a private equity buyer

Price

Despite their reputation for cost-cutting, PEGs can often pay top dollar for mid-market businesses. PEGs that already own other companies on your niche can get more value by acquiring your business, and may be willing to pay a premium as a result.

Time-to-Close

Private equity groups have full discretion over the allocation of the funds they raise from LPs, so they can typically move fast to close a transaction when needed. However, because they are usually investing other peoples money, there's a significant amount of due diligence involved when evaluating transactions which can slow the process down.

Post-Transition

PEGs do unfortunately live up to their reputation of cutting costs and "flipping" a business after 3-5 years. PEGs raise money from limited partners so they are obligated to report on the annual internal rate of return (IRR). This means they will be under pressure to grow the profits of the business every year no matter what it takes. Usually this means exercising their own judgement to cut headcount, shut down product lines, or merge the business with another portfolio company.

PEGs often prefer the seller to stay on for a period of at least 12 months to help with the transition if the intent is to continue to grow the business, or to integrate it into an existing platform.

Questions to ask a private equity buyer

• What type of strategy are you pursuing in my industry?

• Are you looking at my company as a platform, or as an add-on to an existing portfolio company?

Conclusion

Selling your business to a private equity group be a great option if you're the owner of an attractive, profitable businesses with more than $1m in profits and want to to get the best price possible.

Dealwise has the largest network of buyers looking to deploy capital to acquire small businesses across the US and Canada. Contact us below to get a free valuation and learn what your business could sell for in today's market.

The content of this article is not financial or investment advice and should be taken as such.