According to a 2016 report by Bain and Company, private equity firms raised $527 billion in 2015, specifically to acquire and grow operating companies, with an additional $1.3 trillion of uncommitted capital available. The private equity market is thriving, with thousands of firms in the US and Europe actively seeking investment opportunities. In 2015 alone, these groups invested $282 billion in 1,800 private equity deals. This provides tremendous opportunities to sell or recapitalize your business.
Unfortunately, many business owners fail to realize the maximum value for their businesses.
Limited access to buyers and unfamiliarity with the broader universe of investors are significant obstacles. Even with extensive knowledge of direct competitors, they may miss out on potential strategic fits, both domestically and internationally. Furthermore, numerous financial buyers have amassed substantial capital for direct investment in private companies.
To ensure business owners obtain the best value when selling their businesses, professional marketing to various investors and buyers is essential. By exploring options and working with experienced investment bankers, business owners can create a competitive environment that attracts strategic buyers and private equity funds seeking acquisition opportunities.
Investors Seek Acquisition Opportunities
In today’s economy, corporate America is estimated to have over $2 trillion in cash reserves waiting to be deployed. The opportunity for business owners to exit their company and obtain a premium price perhaps has never been greater. One of the outgrowths of the leveraged buyout craze of the 1980s was the recognition that strategic corporate acquisitions can be a cost-effective strategy by which to grow revenues and earnings.
As a result, numerous corporations actively seek a steady stream of acquisitions that meet their investment parameters. In general, midmarket corporations with annual revenues between $5 million and $100 million are in the greatest demand. They can command premium prices because the addition of the acquisition to the acquirer’s existing base of business can increase shareholder value substantially, far beyond the dilution incurred from the transaction.
S.B’s have the ability to increase the company’s profitability and augment its value. This often permits strategic buyers to pay a premium for highly desirable assets. Moreover, a sale to a strategic buyer is typically an easier transaction to complete because the buyer is already familiar with the industry. This facilitates their due diligence. Also, the typical strategic buyer already has management in place that can provide a smooth transition to the new ownership. This minimizes implementation risk. When all factors are considered, the need for companies to invest the cash on their books, strategic buyers are among the best targets as potential acquirers of your company.
Competing with strategic buyers for high-quality corporate assets are financial buyers. This includes private equity funds. Private equity funds raise large pools of capital to acquire companies on a leveraged or unleveraged basis. During the buyout craze, bigger was always better for these investors, but in today’s market, these groups invest in the full spectrum of companies, including small-cap, midmarket, and large-cap companies that may be either profitable or losing money.
Substantial Potential for Acquisition among Private Equity Buyers
Among private equity investors, any company that has intrinsic value has a high probability of attracting one or more buyers. But regardless of the size or financial condition of the target company, in each private equity investment, the underlying motivation is the same as for that of a strategic buyer: to acquire a viable business and bring management expertise together with capital. This creates real value for the fund’s investors, the company’s management, and employees.
To get an idea of the depth of the private equity market and its appetite for corporate acquisitions. Private equity firms have more than $1.3 trillion in capital to be invested in transactions. Nearly $500 billion of that is strictly for buyouts that they need to deploy. If not they run the risk of having it return to investors. In addition to the funds that focus on large-cap transactions, the private equity market also contains hundreds of smaller funds capitalized with as little as $50 million. However, each fund that is created invests pursuant to a specific company profile in accordance with the fund’s established investment parameters.
In this manner, each fund develops expertise in specific markets and analyzes similar companies, which can be advantageous for sellers because well-managed companies tend to stand out and get rewarded with higher valuations. Moreover, private equity funds are usually managed by sophisticated investors with operational experience and a successful track record of investing.
Very often, the investment team includes former corporate executives with senior executive operational experience, which they can use to evaluate companies and grow them. In some cases, these investors will purchase less than 100% of a company and then provide additional capital and management expertise.
Importance of Creating a Competitive Environment
The combination of financial buyers and strategic buyers in any proposed divestiture is beneficial for business owners as it almost always leads to higher transaction values and multiples for corporate assets and cash flow. This holds particularly true for companies with above-average margins or rapid growth in large and deep markets.
However, the challenge for business owners seeking investment or a full exit lies in accessing:
- These buyer groups
- Effectively presenting their company
- Fostering a competitive environment to maximize interest
- Ultimately achieve the desired price or investment
Therefore, it is crucial for business owners to recognize that successfully managing the business sale process requires market-based experience and an understanding of how companies are analyzed and evaluated by various buyer classes. Working with established investment bankers enables business owners to better maximize their interests throughout the sale process.