Courting Private Equity

The private equity (PE) sector represents possibly the largest prospective pool of business buyers today. Unfortunately, these buyers can be hard to reach. Unlike international buyers, which are actively making acquisitions, many PE investors are currently sitting on a large amount of funds with defined time horizons.

To increase odds of attracting these buyers today, sellers must be aware of the obstacles in dealing in the PE universe, as well as the opportunities to position their businesses favorably. The investment bankers at Doeren Mayhew Capital Advisors have outlined a few below.

Know Your PE Types and Their Pitfalls

When seeking PE investment, sellers need to do their best to avoid financing contingencies. We have all heard of PE firms without committed capital shopping for equity financing after executing a Letter of Intent, or even simply have their deals fall apart at the last minute when they are unable to obtain the necessary capital.

Showcase Your Resilience

Many PE investors have remained on the sidelines over concern that deals have a high likelihood of failure. A company could look attractive on initial inspection, but suddenly diminish in value if the economy stumbles. Sellers in cyclical industries such as manufacturing and construction are particularly vulnerable.

To attract PE buyers, sellers must showcase their stability. This means emphasizing:

  • Recession-proof qualities – If possible, sellers should highlight their record of reliable revenues in various market environments.
  • Efficiency – Show how you reduced expenses during a downturn. The ability to trim inventories and cut debt will appeal to PE firms looking for healthy balance sheets and less risky acquisitions.
  • Steady cash flows – Even cash-rich PE investors will find a seller with the ability to generate consistent cash flow appealing. Such targets can provide buyers with financing to make additional deals in the future.
  • Collateral – Your company’s liquidation value — accounts receivables, fixed assets and inventory — reduces risk for PE investors. Such collateral will help determine the deal terms that are offered.

Consider Your Industry

Being in the right industry or sector also plays a role in attracting PE investment. PE investors find businesses with leverageable assets and predictable operating cash flows in the healthcare, distribution, manufacturing, business and consumer services industries particularly attractive.

Many of the factors that drive PE firms to make acquisitions — debt market conditions, investor’s target rate of returns, industry outlook — are out of a seller’s hands. What sellers can do, however, is work with knowledgeable M&A advisors at Doeren Mayhew Capital Advisors, to prepare for sale, learn what PE buyers are looking for and then promote the most compelling compatibilities. Contact them today.

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