Recently Mergers & Acquisitions magazine met with Mike Taylor of Midwest Growth Partners (MGP) to discuss current market conditions. The gist of the interview drilled into current trends not just in M&A in general but specifically in the lower middle market (LMM), which is usually defined as deals valued below $100 million.
MGP is a “$41 million private equity fund seeking investment opportunities in growth-oriented companies located in upper Midwest communities.” Mike Taylor is a managing partner with the firm and has extensive experience in lower middle-market acquisitions.
And in his view, the time is right for family firms to sell.
Even though the demand for larger deals has slowed slightly this year, according to Taylor, the factors driving family business sales are far different. He sees the current environment ripe for sellers, as buyers in this niche are very active. And more and more family-owned firms are realizing that since their owners are aging, a planned, well thought-out succession plan is needed. That is where private equity firms (PE) like MGP play a key role.
This is how MGP describes its focus:
Midwest Growth Partners acquires and invests in companies across the upper Midwest. They focus on manufacturing, food & agriculture, distribution & logistics and business service companies but will opportunistically look at other industries.
As a lower middle market fund, MGP makes individual equity investments ranging in size from $500,000 to $5,000,000 depending on the structure of the transaction and nature of the investment.
Investments could represent an outright acquisition, majority growth capital, minority growth capital, partial or full management team buyouts or an internal recapitalization.
One of the insightful questions that the reporter from Mergers & Acquisitions asked Mr. Taylor was this: How does a family-run business choose an equity partner? Taylor had some great input.
First, he indicates that they should be mindful of their priorities. If getting the maximum value for the business is the primary goal, then an equity firm is probably not the best option in general. PE firms typically have strict guidelines for the internal rate of return that they have to generate via their investments; meaning that usually other buyers like strategics will pay a higher multiple.
However, if you are more concerned about the family’s business legacy, employees, reputation, and community, then partnering with an equity firm could be a great option because most make a significant commitment of time, capital, and personnel in their holdings. As we have seen, this can have a tremendous impact on the growth of a company invested in.
Our experience with family-owned businesses has taught us one key thing: Most are woefully underprepared for any type of exit event, and this can be devastating to the family’s financial legacy if something occurs that forces the firm to experience a succession to either another family member or an outside individual(s). I am, of course, referring once again to one of the Big D’s:
We have met with spouses, for example, at our exit planning conferences who share just how difficult it was to take over the daily management of the family business due to the sudden and tragic death of the founder. This is especially traumatic for the family if the surviving spouse was not involved in the business before.
The good news is that with some planning and effort you can not only avoid this scenario but also plan an exit that maximizes your financial return. If you are like most business owners and you have no exit plans in place, you should attend a Generational Equity M&A seminar. We hold these regularly throughout North America and they are designed to provide you with enough information to initiate your personal exit strategy.
Carl Doerksen is the Director of Corporate Development at Generational Equity, part of the Generational Group.
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