Do Private Equity Firms Invest in Small Companies?

By Generational Equity


We are asked the question in the title of this piece quite often at our exit planning seminars. Because it is an area of interest for most business owners, we spend time on it in the teaching we do on the merger and acquisition (M&A) process. And even though we know equity firms are interested in lower middle-market companies because they tell us so (we have more than 34,000 registered buyers in our buyer database – buyers who have told us exactly what their investment criteria are), the data continues to amaze us.

The latest research from PitchBook* illustrates my point:

*PitchBook is a leading research company focusing on private equity and venture capital firms.

As you can clearly see, right before the recession hit in 2008, mega deals became very popular (and unwise in hindsight), causing the percentage of deals acquired by equity firms valued below $100 million to drop to around 60%. Post-recession, though, we are seeing a completely different story with deals in this range making up nearly 70% of all transactions last year.

The biggest increase can be found in deals closed below $25 million in value. Last year that range was around 45% of all transactions closed by equity firms. Think about that for a moment … nearly half of all deals closed by equity firms last year were small deals!

Again, even though we know this from experience, the data is amazing, and because it is not widely publicized, the small business community is largely unaware of this ongoing trend. For this reason, we hold M&A workshops: To make sure that every entrepreneur who is considering selling his/her company is aware of all their options, including selling to PEGS (private equity groups).

If this is news to you, attending a Generational Equity exit planning/M&A seminar would be very helpful.

What You Need to Know

Of course, not every smaller privately held company is a logical target for a PEG. These professional buyers have very specific guidelines they use for their investments. Industry, location, company growth trends, opportunities for expansion, company strengths, solid middle-management, lack of customer concentration – these are just a few criteria they tell us that they are looking for when we meet with them.

And this is another really good reason for you to attend one of our seminars: Your business today may not be “buyer ready” right now. We will give you ideas and concrete steps to follow that will in a relatively short time position you to be more attractive to these types of buyers.

But certainly, as we discussed a couple of days ago, more and more equity firms are using an add-on strategy to expand. Time and space do not allow me to delve into the description of how the add-on system works; however, suffice to say one of the reasons small transactions are now accounting for a larger piece of the M&A pie is because equity firms understand that acquiring and building a smaller company is far less risky than investing billions in the hopes that one transaction works out.

Naturally knowledge is key when considering the sale of your business. Fortunately, you have two options you can pursue:

  • Review our complimentary whitepaper library and download any piece there that you want to read
  • Attend a Generational Equity M&A seminar (again complimentary and no-obligation on your part)

Why do we believe so passionately in educating the small business owner about his/her options? Because based on our research, the sheer volume of businesses changing hands during the next 5-10 years will be unprecedented due to the baby boomer retirement explosion. We firmly believe that most business owners are woefully unprepared when it comes to exit planning, which gives buyers all the advantages in the acquisition process. Generational Equity, as its name implies, is dedicated to helping entrepreneurs learn how to release the generational equity that is contained in the business. And this is vital since for most families, nearly their entire net worth is tied up in the business.

To find out if attending one of our seminars makes sense for you and your company, please call us at 972-232-1121, fill out a contact form, or spend some time on our website to learn the typical agenda we follow at our seminars.

No matter what, do yourself a favor and research best practices in selling your company long before you approach buyers. It could save you millions!

Carl Doerksen is the Director of Corporate Development at Generational Equity.

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