Private Equity and Strategic Buyers Turn Business Exit into Opportunity

Business owners may have goals for their companies that outlive their ownership, and the right type of buyer can enable a seller to transform a business exit into a springboard that boosts the company to its next growth plateau. Trusted advisors, including an investment banker, can help identify these types of buyers and set the stage for investment and growth that will help realize the seller’s goals.

Private equity investors and strategic buyers come to the table with plans and goals of their own for which your company may provide a perfect fit. In many cases, their investments require the selling business owner to stay on board for two years or more to help guide the transition. Sometimes, the seller also is expected to have some skin in the game by making a capital investment to maintain a minority position in the company.

Private Equity and Strategic Buyers

Private equity investors and strategic buyers usually have different goals and different approaches, so sellers must understand what each type of buyer brings to the table and how they might help the seller achieve their goals for the company.

Private Equity

Private equity investors often are looking for deals that provide an important piece of a larger platform they are building out. They may focus on vertical integration within a specific industry – or some other scenario – for which your company provides the right synergies. They are looking for metrics that make sense for their investment plans, and they often plan to make operational and technology improvements to their portfolio companies that fuel their return on investment.

Typically, a private equity investor will come in as a 51% owner and ask the seller to reinvest in the go-forward entity at a 10% to 35% position for a defined term like two years. These buyers often see the seller’s reinvestment as an indicator on how bullish they are on the company’s future.

Many private equity investors have a finite time horizon by which they expect to sell their portfolio companies and realize their return on investment. However, some hold companies for the long term, usually businesses in the same industry or connected industries that provide opportunities for the investors to exercise their business operational skills.

Strategic Buyer

A strategic buyer likely knows your industry and is attracted to your company because it rounds out their product line, builds their customer base, or brings some other strategic advantage to the deal. Having a knowledgeable, experienced management team in place at your company, as well as the general infrastructure required of companies in your industry, are added advantages. The buyer is able to tuck the acquisition into their existing platform without significantly increasing overhead.

Your competitors, suppliers, and even customers may emerge as potential strategic buyers once your company is on the market. With continuing supply chain disruptions plaguing many industries today, customers, in particular, may come forth as strategic buyers to ensure a steady supply of the raw materials or components you sell them.

Marketability

When you’re looking to exit, you may find only strategic buyers interested in your company. Some industries are boutique-oriented and have limited marketability, while others are broad-based with a wider audience of suitors.

If you believe your company has strengths that a broader audience of strategic buyers and private equity investors would find attractive, hire an investment banker who has resources and contacts in those circles. They know where they can place a deal.

Embarrassment of Riches

How do you decide who to sell to if you have a third-party buyer, a strategic buyer, and a private equity investor lined up at the door?

Some deals are easier to get done and others require more work by the seller. Generally, the decision comes down to the deal that’s easier to accomplish. A seller may decide to forego a higher price if another deal can be accomplished with fewer hoops to jump through.

Another factor that can influence the selection of a buyer is the potential for future payouts beyond the immediate selling price. One business owner sold to a private equity investor and reinvested 15% for a minority position. There have been two more private equity infusions since then, enabling the original owner to cash out twice.

Selection of a buyer also can depend on how involved the seller wants to remain in the company. Some sellers want to cash out and retire, while others want to remain involved and work alongside the investors to help the company get to the next level.

Bottom line: there’s no cookie cutter approach. Selection of a buyer and a deal structure comes down to the personal preference and needs of the seller.

Strong M&A Market

Today’s exceptionally strong M&A market means opportunities are plenty for owners looking to sell or attract investment that will make their last few years at their companies more productive and profitable.

Contact your Barnes Wendling advisor to discuss your business exit plans and your next steps.

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