Some flavors are simply better than others
Company owners are commonly bombarded with unsolicited expressions of interest in buying their company. Some are real and some are not. Some are very good guys. Most of the rest are decent people, but money is a weakness for many, one of the seven deadly sins. That leads to the rest. How do you know who is who?
The world has changed in the last 35 years. In 1979, when I started my career, Private Equity Groups (PEGs) didn’t really exist, certainly not in the middle-market or lower middle-market. When they did emerge, they were called buyout firms, or LBO funds or LBO firms. They used financial engineering , primarily financial leverage, to get their required return on investment. And then there were the asset sales that broke the company up into parts to reduce debt quickly. Those days are long gone. The low hanging fruit of yore – the under-managed company – has long since disappeared. The increasing efficiency of the large corporate and middle market is forcing PEGs to look at smaller companies and focus on operating skills rather than financial engineering.
Today we see PEGs, Family Offices, Strategic Acquirors, Fundless Sponsors, Pension Funds, and international strategic acquirors all as possible buyers for companies. Even within each of these categories, there are a number of varieties.
PEGs have segmented into industry/sector specializations, control versus minority position, and active versus passive management. There are funds that specialize in minority, typically passive, positions. We see a growing specialization in Oil & Gas, Healthcare, IT, Technology, and Agribusiness/Food segments. New specializations sprout up with alacrity, such as funds focused on companies in the Sustainable/Cleantech space. PEGs use OPM (other people’s money) and have roughly a 7-year time horizon before they will resell the companies they acquire.
In addition to their equity funds, many PEGs now often have pure debt funds and debt-with-warrants funds that permit recapitalizations of companies where the owner wants to take cash off the table but not cash out. These funds sprouted up to offer a high fixed yield to investors in the post-financial crisis period. The debt funds usually have a 5-year period before they exit. Most funds are guys in white hats, but some wear black hats, and use the debt as a call option on the stock of the company or its assets. It’s important to know who is who.
Family Offices are invisible to many. They prefer it that way. From the outside, they may look like any other PEG. They are high net worth families with assets in the hundreds of millions or billions of dollars and manage their wealth much like a PEG would, except it is their money. These families usually created their wealth building a company that was sold at some point in the past. They oft times have valuable skill sets to bring to the table, and have longer time horizons over which they invest, sometimes infinite. Most family offices are nice people, but it is very uncommon for them to reach out to a company owner themselves.
Strategic Investors can be broken into two categories: you direct competitors and everyone else. Competitors commonly want to steal your trade secrets: customer lists, manufacturing processes, or some other secret sauce. If they don’t want to steal your trade secrets, they want to steal your people, or something else you have. Unless you have built the Chinese Wall in your sector, their only goal is to put you out of business. If you have built the Chinese Wall of your sector, don’t let them through the gates.
Non-competitors are usually large companies looking to sell into your customer base, use your products to sell into their distribution systems, or some other strategic reason. If the non-competitors are large, as in a billion in sales and publicly traded, they may offer the highest sale price.
Large Strategic Investors’ scale creates safety through diversification of products, customers, geographic markets, and management. When they acquire your company, they usually fold you in, eliminate your corporate overhead, and get a positive bump in their stock price. The best of these buyers are experts at what they do, buy companies regularly and understand merger integration. If they don’t, it is best to be cautious.
Fundless Sponsors are a bit of an odd duck, and quite likely to call or write to you to buy your business. A Fundless Sponsor is someone that does not have their own capital to invest. They have to raise capital for every deal they do, and are rarely the people that will run the deal or the company. The control party is the one with the actual equity in hand. The universal truth is that Fundless Sponsors are looking to buy a company off-market and below market value. Some Fundless Sponsors are very professional, but some are not, and can waste a lot of people’s time and money in the sale process.
Some Fundless Sponsors paint themselves as either a PEG or an investment bank. If they position themselves as the former, they are deceitful. If they position themselves as the later, they have conflicts of interest. If you work with a good investment bank, there is no need to work with a Fundless Sponsor, as it is far more productive to take the transaction straight to the ultimate acquirors. A good investment bank does not buy companies or have a fund. That is a red flag, and a huge conflict of interest.
Pension Funds have started to do direct investing in recent years. Traditionally, they have invested in the funds that PEGs operate. Some Pension Funds are huge, such as CalPERS (California Public Employees’ Pension System), and very long term in their approach. Pensions are nearly universally good guys, but to date, I have never heard of one calling or writing a privately held business owner to acquire it.
International companies can be attractive acquirors, particularly if you have a customer list or distribution system that helps them access the US market without having to build it themselves. Sometimes they want your technology. The way they do business is dependent on their culture and business culture, and they are many times so different from those of US companies that we may as well be from different planets.
Regardless of who wants to buy your company, it’s important to remember they are professional acquirors, have dozens of deals under their belts, and want to buy you for less than you are worth. Getting someone in your corner evens the odds, and permits the creates the kind of competition that brings results.
