On July 30, 2014, I spent the afternoon with representatives from five United States based private equity firms: Audax Group, Bertram Capital, Clearview Capital, Evergreen Pacific Partners, and Huron Capital.Partners. The firms had arranged a wine tour and dinner with a select group of Vancouver based professionals involved with the sale of private companies and public company spin-outs. I love spending time with people who are intelligent and who love what they do. This group met that criterion and more.
Few Canadian (or U.S.) companies think of selling their business to a private equity firm when looking for an exit. The main reason is how the sale process tends to be initiated for small and mid-market companies. Another reason is that companies and the professionals around them do not really understand what private equity firms do.
Initiating the Sale
Often the sale process of a private company is initiated by an unsolicited offer from a competitor or a party looking for an entry into the target company’s industry. I try to encourage clients in this situation to do a few things before they seriously deal with the offer. First, to consider if they want to, or are ready to, sell their company. Second, if they are ready to sell, to obtain a valuation and/or look for other potential buyers. Third, to not to feel pressure to take the offer in front of them before determining if it is the offer they want to accept. If you have a good company there will be other offers. It is very rare that the first person that approaches a company with an unsolicited offer is the best offer.
RwE Growth Partners, Inc., Sequoia Mergers & Acquisitions Corp., Alvarez & Marsal Canada Securities ULC, Raymond James Ltd.’s Merger & Acquisition Group, Ernst & Young Transaction Advisory Services are but a handful of non-legal professionals in Western Canada who work to get the best sale price for their client’s companies. Although owners of a company can deal with potential buyers directly they are unlikely to be as efficient or knowledgeable about how to maximize value and obtain the right seller buyer fit. Experienced merger and acquisition legal counsel can also fill this role if part of the agreed scope of work. All of these professionals will ensure the broadest range of industry, strategic and private equity buyers are canvased to ensure the best price and buyer fit for the company.
What is a Private Equity Firm?
Private equity firms are investment companies that, as a rule, do not hold publicly-traded securities. Instead, they hold full or partial ownership in the equity of private companies. Investors of private equity firms are usually made up of institutional investors and accredited investors.
In a typical deal, a private-equity firm will buy a company with a combination of its own money and debt from a third party. Its goal is to maximize shareholder value by improving the performance of its platform companies. As such, private equity firms frequently take a major role in both operational and strategic decision-making in their platform companies. Platform companies eventually are sold or taken public once they have been advanced to a higher valuation. Private equity firms also acquire companies to be merged into their platform companies when there is a strategic fit. These non-platform companies or “add-ons” can be of any size.
Why Consider a Sale to a Private Equity Firm?
There are pluses and minuses in selling a business to any buyer whether they are an industry, strategic or private equity buyer. Some of the advantages of selling to a private equity firm include:
- Flexible deal structure. The transaction may be structured as all cash, cash and shares, cash, notes and shares, earn-outs or other combination. In a cash and share transaction the seller may continue to be involved with the company with a consulting or employment agreement. The seller gets to participate in the continued growth of the company if the transaction is structured as a cash and shares transaction. Private equity firms have investment time frames when that second exit occurs for the seller unlike competitors and strategic investors who may offer a similar cash and shares or all share deals.
- Large cash resources. Platform companies generally have access to larger pools of cash after sale to expand business or acquire competitors or strategic targets.
- Maintenance of corporate culture and jobs for current employees. The management team and current employees of platform companies are generally left in place to operate the business as usual maintaining the corporate culture. Competitor and strategic investors will generally downsize and consolidate management and employees into their business and corporate culture.
- Specialized expertise and resources to take company to next level. Private equity firms acquire platform companies to bring them to the next level and enhance their value. These firms often have specialized expertise and resources to break through any barriers to growth.
- Deal Certainty. If a letter of intent is signed with a private equity firm, subject to an unknown dealer killer being uncovered in due diligence, the transaction will close.
- Quick Sale. Transactions with private equity firms close within three (3) (standard) to six (6) months (complicated) on average.
- Peripheral advantages. Private equity firms often bring deep industry experience, talent, connections and potentially new markets to their platform companies.
A partial sale to a private equity firm is also advantageous when you have any of the following situations:
- Cash-out a co-founder. A founder may who want to sell for a variety of reasons. Other founder(s) and investors may want to remain (private equity firm usually wants a controlling interest);
- Buy-out existing investors. One or more investors may want to exit while founders and other shareholders want to stay-on.
- Need for expansion capital. Company may have exhausted other avenues and need new capital for growth acquisitions, product line development or expansion plans.
- Recapitalization of business. Near term turn-around candidates or companies that have potential to be profitable in the near future (usually new team with past experience in similar situations.)
What Type of Companies are Private Equity Firms Looking For?
Private equity firms are looking for companies successful in their industry and have room to grow. Ideally a company should have the potential to double in value in 5 years. It should also have strong management in place that will remain after the acquisition or investment by the private equity firm.
Below is a basic summary of what the five firms I met with on July 30, 2014 look for in a platform company. More detail is available on their respective websites.
|PE Firm||Target-Co Industries||Target-Co EDITDA||Target-Co Value|
|Audax Group||Business & Consumer Services Energy Healthcare Industrial Technology, Media & TelecomUSA & Canada||$5 – $30 million platform companiesAny size if add-on company with strategic fit with a platform company||$50to $250 millionAny value if add-on company with strategic fit with a platform company|
|Bertram Capital||Business & Consumer Services Healthcare Industrial TechnologyUSA & Canada||$7 – $30 million platform companiesAny size if add-on company with strategic fit with a platform company||$30to $250 millionAny value if add-on company with strategic fit with a platform company|
|Clearview Capital||Manufacturing Specialized Services Branded ProductsUSA & Canada||$4 – $20 million platform companiesAny size if add-on company with strategic fit with a platform company|
|Evergreen Pacific Partners $700 million of committed capital||Business & Consumer Services Industrial TechnologyWestern USA, AB & BC||$50 million and above for platform companies|
|Huron Capital Partners||Business & Consumer Services Healthcare Specialty ManufacturingUSA & Canada||$5 million and above for platform companiesAny size if add-on company with strategic fit with a platform company|