In considering a potential sale of their company, most middle market business owners know that multiple types of buyers may exist in the market, among them strategic buyers and private equity (“PE”) investors. Further, they understand that a strategic buyer might represent the pathway to a 100% sale, while partnering with a PE investor may represent an initial majority sale event (e.g. 80%), followed by a secondary sale event in the future.
Despite a general familiarity with the concept of PE, many business owners are less likely to fully appreciate the breadth and depth of the landscape that has developed over the last 20 years. According to PitchBook’s 2016 Annual U.S. PE Middle Market Report, there are about 5,000 PE firms globally. In the U.S. lower middle market alone, 748 buyouts were completed in 2016 for an aggregate deal value of $36 billion, both figures representing increased activity over recent years. The proliferation in the number of PE firms has resulted in a highly competitive market as well as an evolution in the investment strategies and transaction structures which are being deployed, some of which may have specific appeal to certain business owners.
While organic growth and the use of leverage can generate equity returns, PE investors are increasingly specializing in areas where they have proven to be able to deliver strategic value to companies. One strategy is a targeted focus on select industries with a specific investment thesis, often accompanied by access to seasoned executives with relevant experience and relationships which can be deployed into management or board-level positions. Additional capabilities may exist to support global expansion, complementary acquisitions or operational improvements. Still others may leverage a specific track record of success in supporting high growth companies or businesses in distress.
In recent years, the market for non-control deals (e.g. 20-49% purchase) has opened up significantly, not just among PE investors who are willing to do minority deals, but funds that are designated specifically for this purpose. A minority sale might appeal to the business owner who desires a partial, non-control liquidity event to diversify their wealth or to buy out another shareholder, and/or to pursue strategic initiatives with the support of the capital or expertise that a PE investor can provide.
Additionally, creative transaction structures can be designed which balance current value versus future proceeds which may vary upon various investor return scenarios at exit. For PE investors, minority deals can provide the opportunity to invest in companies that otherwise may not be a candidate for a traditionally structured transaction, while aligning with business owners who have a sound strategic plan for their company and desire the support of a PE investor in order to execute their vision.
Traditional PE funds are typically raised from predominantly institutional investors and have a defined life span, which may dictate limits to investment hold periods. Another category of financial investor is the “family office,” typically high-net-worth individuals or families which invest into businesses in much the same way as traditional PE investors, but which may have greater latitude with respect to their investment time horizon. Another example is the publicly-traded PE fund, which may de-emphasize exit proceeds in favor of annual income in the form of dividends or interest. Transactions with these types of investors may appeal to business owners who wish to see their companies owned by an entity with the ability to be a steward of the company for a longer period of time.
Given the myriad options which exist in the market, business owners should consider the full spectrum of transaction alternatives available. The role of an investment banker begins with understanding shareholder objectives, which themselves may be nuanced. Approaching the market with a clear and consistent message of what business owners are looking to accomplish in a transaction is critical to running a successful sale process. An experienced investment banker can provide his or her clients with a market based perspective on which structures might be possible under different circumstances and can ultimately assist in negotiating for an outcome that matches each client’s individual objectives.