There’s less and less elbow room in the world of buying private companies. The crowding of the marketplace was confirmed by recent data from Pitchbook, which found that the global number of active private equity firms is up 143% since 2000. In the U.S. alone, the number of active PE firms has nearly doubled, from 936 in 2000 to 1956 in 2014.
The rapid expansion of the industry has created a transaction community that’s become expansive and fragmented — a seemingly limitless number of PE firms, raising more capital than ever, looking to buy up the most promising companies. This makes for an increasingly competitive landscape for investors, all trying to find, connect with and close the best deals first.
For private companies, the implications are simultaneously advantageous and complex. While it’s been called a seller’s market — companies who are raising capital or approaching a sale have an increasingly large pool of investors to consider — navigating such a transaction has presents some difficulties for CEOs looking for the best fit.
Private Equity Response
Much has been written about some of the many outcomes of this trend both in how PE firms market themselves and manage their portfolio companies. Firms are now touting their ability to add value to companies strategically, acting as specialists, focusing on their role as operating partners, and adapting business development efforts, from utilizing online deal networks to publishing their expertise to drive awareness. Steepening competition not only drives deal sourcing angst but also reinforces the importance of finding a way to drive returns that will satisfy their LPs.
Seller’s Choice
Although there are a record number of firms looking to buy, private equity’s response to this trend means private companies need to take the time to consider what’s most important in the sale. With all the ways private equity firms are adapting, companies have both the luxury and the curse to be indecisive.
This means asking tough questions about the future of the business after a sale. Do you want financial stability to pursue rapid growth, an operating partner to help restructure inefficiencies, or professional strategic help from those with deep experience in the industry?
Answering these questions can cement not only the future of your business, but also help ensure the right outcome for you personally after the sale. If you want your company to stand the test of time, then choosing the right successors who are committed to growing the company is essential. If your goal is to maximize the sale price, then planning and undertaking strategies to add value in the years leading up to the sale is key. Regardless, it’s essential for a business owner to think years ahead about how company performance and market conditions will impact interest from different types of buyers. Whatever the motivation, tailoring the sale to the future you envision for yourself and for the company makes finding the right buyer that much easier.
Working the deal
The good news is there is a buyer for each of these priorities — the aforementioned multitudes of private equity firms, each with a different strategy and focus, or another type of buyer altogether. The bad news is that it’s difficult to find them alone. This is where a relationship with an investment banker comes in handy.
But therein lies another choice to be made. Choosing an investment banker might be the most important decision in pursuing a sale, as they maintain relationships with many private equity firms and know what type of buyer will fit with your priorities. But that community too has splintered and magnified, as bankers move on from bulge brackets, starting new boutique firms and regulation has made it so that almost anyone can be an M&A advisor. So how do you find the right banker to lead you through the deal?
It’s possible you’ve been cold called over the years by bankers interested in your business. If you haven’t yet established a relationship, it’s time to do a little speed-dating. Call back a few of those bankers; get recommendations from peers, lawyers, and accountants; or use an online platform to source new relationships. Have a few conversations and see how they sell themselves–this is where you ask the tough questions and evaluate fit:
- What transactions have they completed in your industry, and how recently?
- How many M&A assignments in the last 3 years didn’t close, and why?
- How do you develop your buyer list for each transaction?
- What valuation do you expect for my company, and why?
- Who from your team will be doing what for my transaction?
All of these questions will weed out the advisors most likely to derail your deal, and you’ll be well on your way to finding the best buyer among the growing thousands[1].
While narrowing down a buyer list for your business may seem more daunting than ever, the increased competition and optionality is ultimately a good thing for sellers. If enough time is given to answering the most important questions about the future of the business, you’ll find the buyer best suited to making that future a reality.
[1] Axial Markets – July 2015
