Ever thought your business in California was too small to attract a private equity group (PEG)? Well, you could be mistaken. Many private equity groups are seeking smaller businesses because larger ones are often sold or not available.
It is also helpful to understand how a PEG works. A venture capitalist. They often acquire small businesses as part of a larger transaction.
There are several ways to interact with a PEG. You can make your business appealing to them.
Here are some facts to be aware of.
What a Private Equity Group Does
A private equity group typically purchases a business for one reason: to increase its value within a specified timeframe. This way, they achieve a reasonable return on their investment. The ultimate goal is to liquidate at least their business assets, which is commonly referred to as an exit or a liquidity event.
Thus, the PEG is very focused on cash flow and the equity they get from the sale of the business. There are several ways they do this.
- Bringing together a fractured industry. Often, an industry will have several businesses performing tasks that could be more efficient when combined into a single entity, resulting in significant savings on overhead costs.
- Buying a platform business and adding smaller ones to add value. This means that your business could be that platform, or it could be appealing to them as one of the smaller, but related businesses that allow them to add value to their larger investment.
- Investing heavily in growth. If your business is in a growth sector, a PEG can invest heavily in the mechanisms and strategies to drive business growth, thereby increasing cash flow and overall business value.
Essentially, a PEG usually has a timetable for keeping its investment in a business. This is because they are comprised of several individuals who are seeking a timely return. They want to move on to other investments.
What a Private Equity Group Looks for in a Business
A private equity firm, therefore, looks for a few specific things when it approaches a business. If your business has one or more of those things, it may pique their interest.
- Scalable Growth: With the right investment, can your business grow and scale quickly over the next five to ten years? Is your primary obstacle to growth a funding issue? A PEG investment may be the answer.
- Related to or Part of an Emerging Technology: Can your product or service combine with another one or even several other ones to spur the further development of an emerging technology? Would yours be a good platform company, or would it fit well in a larger industry?
- Cash Flow: One of the primary sources of revenue for a PEG is cash flow, making it a significant factor in its acquisition strategy.
Another factor is that the PEG may want you to continue operating your business. At the very least, they may want you to remain involved for a specific period before exiting. Be prepared for this request and ensure you understand the terms under which you will be expected to operate.
How to Make Your Business Appealing
So, how do you make your business appealing to a Private Equity Group? The first factor is to ensure that you have recast your books from the tax-friendly ones they typically are to reflect your actual income and income potential accurately.
The second step is to gather data and analytics about your industry to demonstrate its growth potential. Be sure to include how your business might fit into the overall picture of that industry. Also, consider how it might pair well with other entities in an efficient manner.
The more of the prep work you can present to a PEG, the less time it will take for them to do their due diligence and make you an offer.
Ready to sell your business and think you might be the right fit for acquisition by a Private Equity Group?
A business broker can help ensure that you locate a PEG that is interested in your type of business. Contact us today for more information. We are here to help the process of selling your business go as smoothly as possible.