Private Equity Backed Strategic Competitors as Buyers for Your Business

Business owners who are thinking about an exit via an external sale will often want to know ‘who is the best buyer for my business?’  In many cases, smaller businesses are unable to attract significant buying interest because they lack fully developed management teams and they do not command a large enough share of the marketplace to create a compelling story. This newsletter is written to make you aware of this marketplace reality in an effort to help you envision who may one day want to own your business.

Private Equity and ‘Platform Companies’ Described

The words ‘private equity’ and ‘platform’ companies can sound a bit intimidating at first to many owners.  The words alone ring of institutional, non-personal entities that are simply in the pursuit of financial rewards, unable to ever understand the delicate nature of an owner’s private business.  Well, while private equity groups are professional investors who purchase private businesses to grow and improve their value, they are often-times owners themselves and are frequently industry experts who are able to bring great value to the companies that they purchase.  The key to understanding private equity is knowing that for an initial investment the private equity wants a certain minimum level of profitability to make the acquisition work.  And, once that initial acquisition is made, the private equity backers of the company will often work with the CEO to acquire additional ‘bolt on’ acquisitions to grow (and perhaps diversify) the business.

A ‘platform company’ therefore is one that the private equity initially purchases that puts them in a certain industry.  A minimum annual profitability of $2 million is the starting point for many private equity investors to take a serious look at acquiring your business as a platform acquisition.  However, if you take a closer look at some of the competitors in your industry and discover that they are already owned by a private equity group, then you may have the ideal combination of factors to be an attractive acquisition for this ‘platform’ company.    What is very helpful to know is that once a private equity group enters an industry, they will likely want to grow by adding companies to their ‘platform’ acquisition.

Why Your Niche Business May be an Acquisition Candidate

Many business owners have lifestyle companies that provide a healthy living for the owners.  These owners often are not working tirelessly to grow their enterprises, mainly because growth includes a lot of work and a lot of risk – two (2) unpleasant 4-letter words for many seasoned baby boomer owners who enjoy the benefits of having a successful business.  When it comes time for an exit, however, these lifestyle businesses are often too big to be sold to another individual but are too small to be attractive as a stand-alone investment.  However, the platform company that is owned by a private equity group in your industry may see your niche business as an attractive ‘bolt on’ acquisition.

Why Does the Private Equity Backing Make a More Interested / Aggressive Buyer?

A majority of private equity group transactions buy into a business with an eye towards how and when they will be able to sell the business again, once it is more sustainable, more profitable and more transferrable.  One of the leading ways that private equity accomplishes these goals is by growing through acquisition (as stated above).  The private equity group brings to the businesses that they own two (2) important components:  first, they bring ready access to equity and debt capital to make acquisitions, and second, they bring the experience of making and managing multiple transactions, reducing the overall riskiness of an acquisition failing.

Why This Combination of Forces May be Attractive to You

Depending upon the personal preferences that accompany your exit transaction, you may find that after you sell your business you want to remain active and productive within the business – this is more often than not music to the ears of private equity groups.  In fact, many private equity groups are just as interested in gaining access to you, as the founder and entrepreneur, as they are gaining access to your company through the acquisition.  The reason for this is that private equity takes a professional view of the marketplace and looks forward, with larger resources, to see how growth can be achieved.  These groups know that if they can access you as the entrepreneur and utilize your highest and best skills for the advancement of their enterprise, then you can be extremely valuable to them as a strategic thinker – more valuable in fact than an operator of your business.

How to Know if Private Equity Owns Any Companies in Your Industry

If this concept sounds appealing to you, your next steps may be to begin a search for companies in your industry that are owned by private equity groups.  Today’s interconnected, online resources make this information readily available.  However, if you want some experienced advice to accompany the research that you are undertaking, contact your professional advisors who have experience in exit planning to make the initial research part of a larger, more important conversation.

Concluding Thoughts

For owners who want to ‘trade in’ their lifestyle businesses but also remain actively involved in the company, the private equity-backed competitor in your industry may provide just such an opportunity.  We hope that this newsletter has accomplished the objective of having you see that your niche business may have the ideal buyer out there today and that you may be only a few mouse clicks away from discovering who it may be.  Depending upon your personal and business goals for your exit, this buyer for your business may be ideal to help you reach your goals of personal diversification combined with continued employment.

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