What your business needs to know about private equity investors

When it comes to selling a business, one pool of potential buyers which cannot be ignored is private equity (PE). These funds specialize in buying and running companies, ultimately growing the business and then selling it for a profit – at least, in theory.

As a business owner, one thing to know is that there are private equity funds which specialize in ‘small’ businesses. These companies have revenues under $10 million, though another important factor is profitability with some funds targeting an EBITDA margin of 20 percent or more.

However, an opportunity that doesn’t make sense for one fund might be just what another fund is looking for. With that in mind, here is what every business owner needs to know about private equity.

Show Me the Money

Let’s face it, the most important factor when you are looking to sell your business is how much you can get for it. While emotional valuations can often cloud a business owner’s asking price, if the numbers make sense, the well-funded PE fund might be able to come up with the cash.

It is important to know the multiples for your industry and for the size of your company. While small businesses with positive EBITDA of $2 million or more can expect to receive roughly 2.5x to 4.0x EBITDA as an offer, this is not always the case. In fact, these multiples can be influenced by what is happening in the broader economy and by trends in other industries.

In fact, when it comes to getting the money you want for your company the best potential PE funds might not even be in Canada. American funds might be more willing to pay a premium due to the strength of the U.S. dollar and the potential outlook for your business in your home province, or even as a turnkey to expand a portfolio company’s presence north of the border.

Let’s Make a Deal

It doesn’t matter who eventually buys your business as just about every offer will include some sort of ‘structuring’. The reason for this is simple – buyers are trying to limit their risk when making a new investment. This holds true for PE funds and in some cases, they might even be more risk adverse when compared to other investors.

One way a PE fund will structure a transaction is to use ‘leverage’. This is debt financing which is usually underwritten by the assets in the company they are acquiring. In doing this the fund can limit the amount of capital they need to bring to the table at the close.

But remember this is not a panacea, as using leverage means that a PE buyer will need to be certain of their ability to hit their growth plan for the business. If not, then they probably won’t be willing to take on the risk.

To Take Control or Not, That is the Question

Don’t assume just because a PE fund has an interest in your company that they will want to acquire you lock, stock, and barrel. Instead, many funds only take on minority interests in the companies they own. This means that they buy less than 50 percent of your company in exchange for seats on the board and potentially one or two management positions.

Now, this can be a blessing in disguise as in many ways a minority investor has a strong motivation to help you grow your business so that they can sell it in two-to-three years’ time for a massive profit.

However, this doesn’t mean that all PE funds will be interested in a minority position. In fact, some funds will want to acquire a small business completely. But, this is usually when it fills a strategic requirement for one of their portfolio companies.

Contact Beal Business Brokers and Advisors to learn more about how private equity investors view small business opportunities.