Selling Your Business? The Private Equity Option

By Generational Equity

10/15/2018

There is a common question we receive quite often at our exit planning conferences from business owners: Does private equity invest in companies like mine?

They ask this when our conference leaders share real stories about the various types of deals buyers of middle market businesses make, including private equity firms. The answer? Several hundred PE firms in the U.S. alone focus solely on smaller acquisitions.

In fact, according to PitchBook, this year is shaping up to be a record year for PE activity in the middle market:

There are many themes in the US PE middle market worth discussing, but one trend we can't ignore is its consistent strength over the years. In fact, 2018 is on pace for yet another record year for both deal counts and transaction value, coming on the heels of a blockbuster 2017. Both figures were ahead of those in 1H 2017—the 1,358 deals worth a combined $178.5 billion from 1H 2018 were 16% and 5% increases, respectively, over the same period last year. [See chart below for details.]

Keep in mind that the second half of most years are much stronger than the first half, so 2018 has a good chance of being a second record year in a row.

Should you consider the “Private Equity Option” when you sell?

One thing to ponder is this: Look at the impact the last recession had on private equity activity in the middle market, which you can see in the 2009 of the chart above. In the midst of the recession PE invested in only 744 businesses worth at total of $75.2 billion, less than half the total deal value through the first six months of this year alone! And the recovery year’s totals, in 2010, were nearly the same for the first six months of this year.

This clearly points out the danger of waiting too long during this current seller’s market to make a move with your company. As PitchBook points out there are a few storm clouds on the horizon:

Two macro developments should also be considered going forward: the ongoing tariff situation that will affect broad swaths of the middle market, and the steady increase in interest rates coming from the Fed. Interest rates in particular are worth noting, as higher interest payments can have an outsized impact on cashflows over time.

Keep in mind that most private equity transactions have some component of financing included in the transaction. Rising interest rates (or even the fear of rising interest rates) can cause PE firms to revalue their perspective on acquisitions. This not only drives down business valuations, but also causes some deals to be scuttled all together when the numbers do not add up to a sufficient ROI.

Is time running out to take advantage of record Private Equity activity?

So, if you own a business, you have two choices:

1. Hang on and hope the seller’s market continues for another year or two (although keep in mind that we are in the fifth year of this current cycle which already makes it one of the longest on record).
2. Start the exit process today by finding out how much your company is worth in today’s market.

If you are like most business owners, a significant portion (if not all) of your net worth is tied up in a highly illiquid asset: The business. Finding out your company’s market value is an important first step in managing your wealth and financial future.

To learn more about your exit planning options and how to begin the process, contact one of our exit planning professionals at 972-232-1121 or visit our website, provide us with your contact info, and we will be in touch.

By Carl Doerksen, Director of Corporate Development at Generational Equity.

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