Selling Your Business: Advice from Private Equity Firms

The Role of Private Equity Firms

When it comes to selling a business with revenues of $10 to $250 million, where would some of these middle-market business owners be if it weren’t for the rise of Private Equity firms as buyers? The reality is, they would either still be running their business, have liquidated their business or potentially sold their business for a lesser sum with perhaps significantly less cash at closing.

While exact statistics are hard to ascertain, each year it is estimated that 15–25% of middle-market businesses that are for sale or looking for some form of liquidity event are either bought-out, recapitalized or receive an investment from Private Equity firms. Despite their rise to prominence as effective and qualified sources of liquidity and expertise for business sellers, Private Equity firms remain a mystery to many business owners.

To obtain perspectives on questions many potential business sellers have asked, Lyons Solutions recently reached-out to the following private equity professionals:

  • Mathew Carroll, General Partner, WestView Capital Partners, Boston
  • Joe Davis, Managing Partner, Triton Pacific Capital Partners, Los Angeles
  • Jon Lemelmen, General Partner, Riverside Partners, Boston

Questions & Perspectives

What are the most important business characteristics a Private Equity firm evaluates when considering acquiring or investing in a business?

Matt: “A passionate, knowledgeable management team that owns significant equity combined with a business model that includes recurring revenue, scalability of its service offering, limited customer concentration, and a product/service with strong Return on Investment/value proposition.”

Joe: “A strong CEO and management team, profitable, proven business model, recurring revenue, defensible competitive position in the market, good growth potential, and realistic future exit options.”

Jon: “End market demand, strong gross margin, a recurring versus one time transaction revenue model, and an experienced management team.”

What advantages does a private equity firm bring to a business seller vs. a strategic or industry buyer?

Matt: “Meaningful management shareholder liquidity with a sizeable ownership stake in future value creation (particularly in a minority recapitalization which is a meaningful part of our business), experience navigating growth and the operational challenges that ensue, and a broad perspective on how to optimally position a company for a strategic sale at some future point.”

Joe: “The ability to partner with management, driving change and an increase in overall profitability and growth of the company which will create value for all the stakeholders. We assist in the evolution of the business to take it to the next level. We leverage our experience to help drive strategy and navigate difficult situations. Companies benefit from our resources, contacts and other tangibles to drive the growth and value of the business.”

Jon: “Transaction structuring flexibility, an ability to retain equity to generate future wealth as the company’s value grows, maintain corporate culture and jobs for current employees.”

What are some of the most common mistakes you see business owners make when selling their companies?

Matt: “Poor tracking of key operating metrics. Failure to call private equity or other buyer references.”

Joe: “The owners hire poor merger & acquisition or investment banking advisors. Similarly, they hire accounting firms and lawyers who are inexperienced in merger & acquisition transactions.”

Jon: “Not being open about big due diligence issues early-on in the transaction process or not providing good and timely information flow. Good Private Equity firms will eventually figure out 90% of these issues and the owners open themselves up for renegotiation or the deal not closing.”

How has the recent stock market volatility and economic slowdown impacted your desire or ability to acquire or invest in businesses?

Matt: “It heightens cautiousness on more cyclical businesses, but overall, it has not had a significant impact as many of our investments are in sectors that can grow through challenging economies.”

Joe: “No change. The debt markets in the lower and middle market are quite robust again, providing the ability to the leverage our equity investment so our required return on investment can be achieved.”

Jon: “No change. Some of our best investments were made in 2008 and 2009. Market volatility makes it better to buy. Frothy credit markets, etc. are less attractive for buyers.”

What do you think will happen with business valuation multiples over the next couple of years?

Matt: “I believe valuation multiples will hold at roughly today's levels. This assumes debt markets stay in and around same / medium level of aggressiveness, businesses won't perform much better or much worse relatively speaking, and private equity capital overhang will still exist to some extent.”

Joe: “This is very industry sector dependent but my guess is with low interest rates and a great deal of liquidity in both Private Equity firms and strategic/industry buyers, we will see a robust merger & acquisition market and could see a creep in valuation multiples.”

Jon: “Valuation multiples seem to be moderating a bit now, but I have no idea what they will be like in 1-2 years. If I had to speculate, I would say flat to slightly down.”

What value does an experienced intermediary bring to a transaction when representing a business seller?

Matt: “The ability to sort through truly knowledgeable and interested buyers/investors vs. window shoppers, to choose a buyer that is truly interested and will close, to flush out key terms that often get sprung on management teams/shareholders late in the process, and to convey key business value drivers to buyers.”

Joe: “A world of difference. When we go to sell a portfolio company, we always hire a merger & acquisitions advisor and we do transactions for a living! For most sellers, this is the first time doing a deal and they need hand holding, advice, and support to run an effective sale process. A good M&A advisor will identify the right buyer for the business and increase the certainty that the transaction will close.”

Jon: “Proper and timely information flow, explanation of key issues, preparing the founder/management team for the diligence process, and providing some leverage for them during the process by taking some things off their plate.”