Selling Your Business?
Do You Know Who is Buying?
If you’re thinking about selling your business, there are a number of things you must do to get it ready – some physical, some financial and some organizational. But have you given any thought to getting your marketing ready? In order to get your marketing right, you need to consider who you’ll be marketing to. And in order to do that you need to know who’s buying so you can tailor your marketing to those buyers.
If you’re a professional business broker – or considering becoming one – this is an important consideration for you, as well. Knowing who is in the market to acquire businesses – or at least the type of business you’re selling – not only informs your marketing efforts but will also save you a lot of time. How? Because you’ll be using the rifle approach – rather than a shotgun one – tailoring your marketing to the most likely buyers rather than to the world at large.
Granted, there are always buyers in the market representing a number of different groups; individuals or small syndicates of friends or associates, strategic and corporate buyers, etc. But sometimes, one group will predominate and as I write this post in early Spring 2018, the buyers that have been contacting us more than any others recently are private equity groups, or PEGs.
Last week’s post explained why now is a very good time to sell a business and it discussed some of the types of buyers, including PEGs, that are out there with money in their proverbial pockets looking for companies to buy. This post is about those PEGs. If you own a profitable business generating between $2 million and $20 million in revenue, this group is interested in talking to you.
What is “Private Equity”?
Private equity (PE) is a financial buyer that invests in private companies of all sizes. Some private equity firms invest across many industries, while others are more specialized and invest in specific channels such as technology or energy services. Large private equity firms typically raise funds via general partnerships from institutional-type capital sources such as pension funds, endowment funds, family offices and high-net-worth individuals. Bit PEGs come in all sizes and the ones that are contacting us – probably because our brokers focus on businesses with transaction values of up to only $20 million – are the smaller ones.
Smaller private equity groups are typically funded by the general partners that manage the fund and sundry high-worth individual limited partners, including so-called “family offices”, that invested in the fund but are not generally involved in its day-to-day investment activities. The typical structure involves a limited partnership (LP). The partnership usually has a finite term, often 10 years, at which time the PEG will sell all of the investments in order to return the original capital plus gains to the limited partners. In addition to capital, PEGs provide other resources to the companies they buy such as access to customers, industry expertise and strategic direction. These resources are often more valuable than capital for company owners looking to grow their companies.
Private equity investors look for companies with solid management teams, recurring customers, high margins, strong balance sheets, and the ability to generate significant free cash flow. The best candidates are private companies that are experiencing rapid growth (organically or through acquisition), a management buyout, or expansion into a new market. They usually have a leading position in their industry, significant barriers to entry, and a differentiated product or service that commands a valuation premium over the competition.
But the current economic environment is not typical. There’s a lot of dough out there looking for companies to buy, in whole or in part. Two years ago, we weren’t getting many such calls. Now we seemingly get one every Tuesday.
Why are PEGs So Prominent Now?
Remember that PEGs are made up of, among other investment groups, high-worth individuals. Most of these individuals are invested in equities (stocks) and stock markets around the world have been enjoying fantastic gains since late 2016. As such, gobs of money are sloshing around all over the globe in search of attractive companies to invest in. In the nearly 20 years we’ve been in business, we have never seen a time when so many PEGs have been knocking on our door.
If you’ve considered selling your business, the process takes planning. I did a recent post on how to get started on this process; essentially the task of putting together an “exit strategy”. The current demand by PEGs may be just the incentive you need to get this process started. But planning an exit strategy is only marginally interesting on a conceptual level – unless you know where you are. That is, what your business is worth.
Do you have any idea? Do you even know where to begin to find out? Few owners do. But if you plan to sell, this is the most critical bit of information you need. PEGs are managed by pros. They do the same thing we or any other professional business broker will. They will analyze the financials and come up with their estimate of value. If you don’t have your own compellingly justifiable number, you are at a disadvantage out of the gate.
The best way to determine what your business is worth is to have a professional business broker or M&A specialist perform a valuation. However, if you’re not ready to hire a professional, I can give you a list of the tools that we generally use that will allow you to get started on determining what your business may be worth. That information will include a link to download what you need to know about – and how to figure – “discretionary earnings” – the fundamental basis on which we calculate value. All this information is completely FREE and comes with my promise to NEVER send you spam! Just tell me where to send “the stuff” in this box and it’ll be on its way.
A Trend Within a Trend
Aside from the increase in PEG activity, we’re seeing a similarly noteworthy trend in the development of small, boutique private equity firms that are interested in buying smaller companies; those with revenue of between $2 million and $10 million. This is indicative of the amount of money that is currently chasing businesses. PEGs ordinarily look for businesses that provide returns in the 20% range. However, with more such buyers in the market, more money funding their efforts and more buyers in the hunt than sellers to be hunted, the current market provides business owners an unusual opportunity to get a higher-than-normal valuation for their business – if for no other reason than that the law of supply and demand is in full force in our industry as in all others.
If you’ve ever considered selling your business, now is arguably the best time in the past 15 or so years to do so. Chat with a professional business broker or M&A specialist – someone that has been in the business for a decade or so – and get their take on what the market looks like to them. Or email me for a private and confidential discussion.
If you have any questions, comments or feedback on this topic – or any topic related to business – I want to hear from you. Put them in the Comments box below. For example, what is your biggest concern about the thought or process of selling your business? Let me know. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a profitable week!