Recapitalization Reason for Sale of Small Businesses
The most recent Market Pulse Quarterly Report found that for the first time in almost three years, recapitalization has replaced burn-out as one of the main reasons that businesses valued at $5-50MM go to market.
Recapitalization is when the owner of a business sells either a minority or a majority share of his or her company to a private equity firm—but less than the full 100%. For example, Chino, California-based Liquid Technologies, a contract formulator and contract manufacturer of personal care products, partnered with the private equity firm Frontenac to complete a recapitalization of the company. The private equity firm invests in lower middle market, family-held, or owner-operated businesses. This investment is the result of Frontenac’s sourcing efforts in the personal care contract manufacturing sector.
With this influx of capital, the business owner—like Chino’s Liquid Technologies—that partners with a private equity firm has the ability to continue to grow the business with reduced financial risk.
The Market Pulse Quarterly Report also found a substantial increase in private equity activity in the $5 million to $50 million category in Q3 2016 with their participation in 50% of the transactions, compared to Q2 2016, when private equity activity involved just 39% of buyers. The report also found that businesses in the smallest market sector (values of up to $2 million) are positioned in a buyer’s market, although seller leverage is improving. Deals that are more than $1 million in value that enter the Lower Middle Market (values of $2-$50 million) favor business sellers.
According to the Market Pulse Quarterly Report, published by the International Business Brokers Association (IBBA), M&A Source, and the Pepperdine Private Capital Markets Project, the increase in recapitalization activity could be an indicator that Lower Middle Market business owners are becoming savvier about their exit planning options and planning more in advance. That’s what Scott Bushkie, the IBBA Chair thinks. “Business owners are increasingly exploring partnerships that enable them to exit out of their businesses in stages and take a second bite out of the apple when they sell their remaining shares a few years down the road.”
“More business owners are finding that recapitalization minimizes the risks and stresses of operating a business,” said Sacramento business advisor Andrew Rogerson, a member of IBBA/M&A Source. “Sharing financial responsibility with a private equity firm is a smart move for business owners who need strategic support or a cash infusion. When owners become ready to sell and retire, recapitalization can make their companies more attractive to buyers.”
Positive Outlook for 2017
Finally, the Market Pulse Quarterly Report found that the outlook is positive in 2017, with 74% of advisors expecting an increase in new clients coming to market this year. Optimism has increased, compared last year. Advisors anticipate greater deal flow, better closing rates, increased business exit opportunities for sellers, opportunities for growth, and an improvement in general business conditions.
The Market Pulse Report compares conditions for businesses being sold on Main Street (values of $0-$2 million) to those being sold in the Lower Middle Market (values of $2-$50 million) and has participation from nearly 300 business brokers and M&A advisors in 38 states.
Contact an IBBM Expert in Sacramento
Sacramento business advisor Andrew Rogerson is a member of the International Business Brokers Association with a CBI credential. He specializes in helping business owners and their businesses. This includes business valuation, marketing strategies, and coordinating all phases of sales transactions.
If you’d like more information about this Market Pulse Quarterly Report, or about financing or recapitalization, visit our website www.rogersonbusinessservices.com/sample-documents. On this page, you’ll find more than two dozen documents available for your free download and use. The documents include sample business plans, spreadsheets for preparing budgets and breakeven analysis, as well as loan amortization calculators and sample loan application forms to see the type of information lenders will require with your loan application.
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