According to the Wall Street Journal (September 10, 2022), private equity does (want to buy your business). PE is reaching to the lower middle market to get deals and “joining America’s family business” community.
Owners who sold to PE firms had some good reasons why it made sense (once they figured out there was no family interest) as they could take money off the table and still be managing the business for several years. I’ll add it appears these sellers did thorough due diligence on the PE firms to make sure it’s the best fit, which is something we’ve noticed sellers don’t do as much as they should. They seem to go on gut instinct more than buyers do.
Not just managing the business but growing because PE firms want growth and need to grow. To the sellers, it meant growth without putting their own capital at risk and being able to make future acquisitions as a strategic buyer. This is one reason why we tell our sell-side clients to make a list of companies they would go after if they (the sellers) were 20 years younger. These are the first add-on targets post-close.
Many years ago, we had a client who wanted to sell as they were moving out of state. I vividly remember her saying, “I will not have [that competitor] taking care of “my customers.” This was brought up in the article, as it’s common. Plus, it’s risky to have “open kimono” sharing of company details with a direct competitor because who knows what they’ll do with it.
Something else appearing to be common is over leverage. When we read about problem deals it’s often because of too much debt. Given most sellers want to preserve legacy, the repercussions of an over-leveraged deal aren’t what they want to be remembered for. In the lower middle market, and especially its low end, this isn’t an issue (too often). Good banks and bankers will watch the total amount of debt and not finance more than should be financed (and a good buy-side advisor should be even tougher on the amount of debt and the corresponding debt coverage ratio).
What do most of these sellers get besides money in their bank accounts:
- The job of CEO, with more capital behind them.
- A board position.
- Rollover equity, and in the article there were examples of how the small rollover percentage became a higher amount than the original sales price.
- To grow with outside investors and their expertise.
As PE firms move down-market there’s an interesting twist. The phrase “micro-PE” is being used. It’s for people raising smaller amounts of money to do smaller deals. Some of those deals are in the SBA loan size range and the buyers have found they don’t have to use just their own and the bank’s money. They can do what larger players do, own a majority of shares in numerous companies instead of owning and operating one business.