Can your firm be sold to a private equity group?
Private Equity Groups (PEGS) have been around for decades, but they have gained momentum as a primary acquirer of small businesses in recent years. Part of the reason for this increase in acquiring activity is the issue of wide stock market swings which motivate high net worth investors looking for more a secure annual cash flow.
Loosely defined as a group of high net worth individuals pooling their balance sheets for investing and developing an acquisition portfolio for diversification, private equity groups are expanding their acquisition criterion into small firms with lower EBITDA. After factoring in the cost of hiring a new general manager, PEGS will now look at EBITDA well under $1M. Business owners should be aware of their adjusted EBITDA figures and have an idea what it would take to replaced with a general manager’s salary.
Secondly, PEG’s normally do not want to be in-house professional operators or managers in their acquisitions. They leave that expertise to the GM they hire and “oversee” from a distance by receiving monthly or weekly performance spreadsheets.
In many instances a business owner / seller is not interested in retiring, but would like to remain as General Manager if office support is sufficient to handle the mundane functions for which the entrepreneur, as owner, is tired of contending. As such, if an owner is interested in helping to run the firm with a PEG owner providing back office support functions, he may stay as GM which will fill a major role for the PEG.
While Private Equity Groups historically have been present in the market place, they are now major players in small business acquisitions. Owners interested in selling should become aware if their businesses will be attractive from both a free cash flow and a transition standpoint. In 2017 awareness of how your numbers fit into the PEG criterion and how to position for transition can make the difference in finding a good buyer for your firm.