PEF Recapitalization Skyrockets Main Street Business Sales
Research shows that small and medium enterprises (SME) or Main Street companies valued at $2-50 million are going to market because of private equity firm (PEF) recapitalization.
The Market Pulse Report, which is published quarterly by the International Business Brokers Association (IBBA), M&A Source, and the Pepperdine Private Capital Markets Project, explains that private equity is an attractive option for some small business owners who are seeking to sell their businesses.
The PEF injection of capital means that the owner can cash in some of his or her equity (typically a majority stake) but also retain a degree of ownership. But like any sale transaction, there are a lot of complexities that owners need to understand before exploring this business transition option.
Simply stated, PEFs are businesses that buy and sell other businesses. They are financial buyers who seek to invest in businesses and sell them at a profit. The objective of these buyers is to scale the company, increase its value over the next several years, and then sell it in the future at a much higher value. They accomplish this by increasing the earnings of the business through more sales, reduced overhead, and via acquisitions. In addition, PEFs use the operating cash flow of the business to pay down the debt.
PEFs usually look to invest in companies that have a strong management team, a solid staff of employees, and high growth potential. These private equity sales nearly always involve the selling owner remaining in an operational capacity. A private equity sale can be advantageous for owners since it reduces their risk and lets them sell part of the business and retain some equity that may grow in value.
In some instances, this two-step process can mean a second payday for the owner when the business sells again in the future.
The Best PEF Investment Candidates
Note that not every transaction is suitable for PEF Investment. You should know that it may be hard to find a PEF with the right resources and expertise to help you grow the business, and you must be willing to work for a boss and be accountable to them for a year or two.
A study by Indiana University found that “less than 3% of pre-negotiations between privately held companies and PEFs lead to a deal closing. This means that the process is exacting as roughly
97% of negotiations PEF’s initiate collapse.” In light of this statistic, business owners must understand what will make their company an attractive target for PEFs and what it takes to close a deal. That’s why it’s wise to enlist the expertise of an experienced business advisor like Andrew Rogerson in Sacramento, California who can emphasize the future return on investment and the growth potential of your business. He will showcase your company’s growth opportunities, reputation, and industry leadership to potential investors.
See if a PEF Sale Is Right for You
Before going down this road, Sacramento Business Advisor Andrew Rogerson suggests that business owners create a business ownership transition plan that explores all the transition options that are appropriate for your circumstances. Andrew will work with you to upgrade your business and promote it to PEF investors.
In addition, he will conduct due diligence and review PEFs that have a track record of success with similar companies and that your vision and goals for the company align with those of the PEF. Start the process in advance and prepare with Andrew for the best outcome.
If you’re considering selling your company and think you need outside capital and expertise to significantly grow its value, a private equity investment may be a wise move. Speak with Andrew about PEF investments and other ownership transition strategies that will enable you to achieve your goals.