Cashing In!
Douglas Group
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Want Cash For Your Business Today,
And Staying Power For The Future?
Consider Equity Funds
As
we face the current uncertain economy, it's easy for the business
family that has all of its eggs in that one business "basket" to feel
nervous. However, there are real alternatives today that simply
weren't there 10 years ago. There is a category of business
buyers - the "equity fund" buyer - which, although it has been around
for many years, has finally, this century, become a true competitive
buyer for the middle market company.
Our firm sells privately
held mid-sized companies - commonly ranging in size from $10 million to
$250 million in sales. We have been doing that for the past 18
years. Only in about the last 5 years have equity funds started
winning our deals!
There has been a veritable explosion in the
number of equity fund buyers recently. Our private database of
qualified equity funds is now over 2,500. Additionally, they are
pricing their purchases today to compete with strategic buyers.
Ten years ago our sellers ended up being sold to private equity funds
in maybe 1 in 10 deals. Today, it's more like half of all deals
in this size segment.
The private equity fund also offers some
twists in form and content which, depending on your circumstances, can
be quite appealing to the family business owner.
Management stays in place
The
private equity funds want management, and even most long time
shareholders, to stay involved with the company. They hope such
historically important key people can be part of the company's future,
and its growth. Private equity funds don't have a stable of industry
experts or other employees which they can move in to replace your
people. If you enjoy your business, but need capital for growth,
or simply want to reduce your risk by taking a few chips off of the
table - they can offer you a great way to do it!
Financial incentive for future growth
The typical equity fund likes to leave anywhere from 10% to
about a third of ownership in the hands of former shareholders and/or
employees. This leaves some of the key operating management with
a strong incentive to continue to nourish and support the
company. In just a handful of years, we have seen a number of
these smaller minority retained pieces become almost as large in value
as the original super-majority sold! If you are optimistic about
your company's future - particularly if your company gets a bit more
capital and some sophisticated advisory guidance, this can be a great
way to direct your future.
Evolving job roles for senior executives (having more fun)
We
also see a great many owner executives who are excellent at certain
aspects of their business, but not at everything. It's those weak
spots that haunt owners and keep them up at night, and they can be the
hardest areas for that owner to mend or to develop beyond. For
example, the owner who is a natural born people-person - a great boss,
and a good salesman - may be weak in financial control issues, or
administrative function (that's not his natural gift, or his personal
preference). Post sale to an equity fund, he has assistance in
getting top quality people in place for those jobs - and he becomes
free to once again do what he's great at. (Win/ win, for both the
seller and the equity fund).
In spite of all of these supportive
and complimentary comments about private equity funds, they are
difficult to deal with for private company sale in a few ways.
The "con's" of equity fund buyers
Equity
funds know less about your industry, and yet can be very aggressive, in
the heat of competition for the deal, in trying to get you very quickly
"committed" to them. They ask for an exclusivity agreement, requiring
you to agree not to talk to other buyers. All too often they may rush
you to that step, before they have evaluated fully. If that causes them
later to "back out," or to propose major changes to the deal,that can
cause you as Seller to have to back away and start the entire process
over. The cost to the seller of a failed effort is enormous - both in
terms of professional service and support, but more importantly, in
terms of lost alternative buyers. Equity funds also depend
heavily on bank backing, they require greater access to employees
pre-closing (even requiring advance contracts in some cases), and they
move more slowly than the average "strategic" buyer. Some equity
funds are far better than others with respect to such negatives, and a
strong intermediary can help you evaluate, control the process, and
hopefully sort these things out.
In summary, equity
groups are a complex and sometimes difficult group to court as
prospective buyers, but it's also a group that can offer a whole new
range of potential solutions for the private business owner who wishes
to reduce risk.
By Deborah
L. Dougas, principal of Douglas Group and author of "Cashing In!
Selling Your Business For Maximum Price." Debbie can be reached
at 314-991-5150 or ddouglas@douglasgroup.net.
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We've
created this newsletter to share timely and relevant industry expertise
on buying and selling businesses. Here we share stories,
anecdotes, and expertise in the world of business sales; also known as
mergers and acquisitions. We can also provide other educational
resources such as webinars, audio CDs, industry books, and
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