How Private Equity Firms Engage Sellers

By Generational Equity


I recently attended a webinar hosted by PE Hub's Buyouts Insider, a leading publisher of M&A and venture capital information. It was an interesting insider’s view on sourcing transactions. “Insider” because the panel was comprised of folks from private equity firms (PE) and companies that specialize in sourcing deals for PE, and the webinar provided a unique view on how deal professionals go about locating companies to acquire/invest in.

I thought I would share a few key takeaways from the webinar with our readers since many of you are owners of businesses that may eventually become PE targets. If you want to listen to the entire webcast you can do so here.

These are the key pieces of information I gleaned that are pertinent to owners of privately held, middle-market companies:

  • On average PE firms see over 500 opportunities per year.
  • If you are going alone, you are going to be competing with thousands of others for PE attention.
  • Documentation has to be what they want to see.
  • They like to use intermediaries (M&A advisory firms) to find sellers.
  • One deal is no deal – they are looking for multiple opportunities in same industry and will try to get the best deal for them. 
  • If they call you, they are going to work to get the best deal for them, not you.

Let’s take a look at these a bit closer. First, bullets one and two go hand in hand: It is amazing how many opportunities PE firms see annually. The folks on this webcast put it at 500 but I have talked to some PE sourcing professionals who put it much higher, more like 1,000 per year. Just think about that for second, if you are approaching PE firms without professional representation, how do you get your opportunity to stand out and be reviewed?

It is very tough, which leads us to bullet point number three: Your documents need to be not only accurate, they also have to be in a format and style that allows a private equity firm to quickly understand your company’s value proposition. You have about 15 seconds to do this in your one-page confidential business profile. If you are unable to, you will get lost in all the noise. Hence the need to produce docs that are in a format they want to see them in.

How To Get Noticed

For this reason, bullet point four is key: M&A advisory firms like Generational Equity provide two key functions: They prepare great documentation for buyers to review AND they ensure that their clients are truly “sellers.” How do they do these things?

Well, experience has taught us what PE firms want to see and how they want to see it. But just as importantly we require an upfront commitment fee for our services (this eliminates the non-sellers) and we conduct a full business evaluation on every client PRIOR to taking them to market. This ensures that our clients know their value before talking to buyers and makes them much more buyer ready than those not using an intermediary.

Finally, more and more PE firms are creating business development teams and/or are hiring companies that specialize in buy-side acquisition searches. This can be good and bad for owners of privately held companies. The good is that they will probably find you if you meet their investment criteria. The bad news is that the PE firm will negotiate a deal that will benefit them, not necessarily you. And since many of these deals are partial sales, meaning that you are retained in the new company, the last thing you want to find out a year after a transaction is that you left significant cash on the table because you were unprepared to negotiate.

We love PE firms, we sell lots of companies to them, but we are not naïve. PE firms survive because they generate an internal rate of return (IRR) for their limited partners that allows them to satisfy their investment needs. This means that they want to pay as little as possible for your company, keep you on board to run it, and flip it 5-7 years out when it is a much larger company. That is great for you, since you will take a “second bite of the apple”; however, no one likes to leave chips on the table via the initial investment.

To prevent that, you need an M&A intermediary to provide wise counsel. That is where Generational Equity steps in: We have over 34K buyers registered in our buyer database, many of them equity firms. On an annual basis, about 25% of our clients are acquired by equity firms either as platform companies or add-ons. We have the experience you need to get an optimal deal for you.

Act now before a PE firm calls you with an offer you think might be too good to pass up.

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

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