Bob Goldsmith is a co-founder and president of New York City-based Northern Edge Advisors, a boutique investment bank and financial advisory firm. Views are the author’s own.
Family-owned businesses are experiencing a continuity crisis. These companies contribute more than half of the U.S. private sector’s gross domestic product, or $7.7 trillion, yet only 40% make it to a second generation of ownership, according to studies from the University of North Carolina at Charlotte and Cornell University, respectively.
For families that decide to sell their businesses, the notable bias against private equity firms, fueled by well-publicized cases of bad behavior, is unfortunate. In a recent New York Times article titled “Private Equity is Gutting America – and Getting Away With It,” federal prosecutor Brendan Ballou recently wrote of the damage some PE acquisitions have caused in several industries, and Vox writer Emily Stewart similarly claimed that PE “kills everything you love” back in 2020 in response to the sector’s role in winding down Toys R US.
Owners assume that PE buyers only make predatory offers and present risks to the ongoing health of the companies they acquire and the communities in which they operate. Conversely, they presume that industry players will pay more and be easier to deal with.
However, by giving too much weight to these negative perspectives which tell only part of the story, owners may make counterproductive and costly decisions when it comes time to sell their businesses. Yes, private equity has its rotten apples, but there are good ones too, and owners can’t afford to discount the advantages these firms offer. There are several circumstances in which owners should be open-minded.
For one, PE firms offer an attractive solution for owners who want to maintain some control and involvement in their business. Strategic buyers typically need full ownership of their acquisitions to consolidate financials and integrate operations. By contrast, PE buyers focus on alignment of interest and ongoing involvement, encouraging owners to maintain an equity interest and managerial role. Owners thereby benefit from their continued contribution to growth and the opportunity to receive a significant future payout.
Secondly, many owners still dealing with pandemic-related burnout, but who are not ready to retire, would value some liquidity for diversification or peace of mind as well as operational support inside the business. They are often overwhelmed by the magnitude of the daily needs of the business and find themselves without time to consider, let alone implement, long-term strategic plans such as expanding into new channels or geographies, hiring top caliber executives, or building out a sales force. PE usually checks all these boxes, providing cash for the owner, dedicated operational resources, and liberation to focus on the business’s most critical growth areas.
PE is also a strong option for owners with limited capital and other resources. PE firms generally approach an acquisition with the expectation that they will invest at least as much capital over time to grow the business as they invested upfront. In particular, for a company with a plan to acquire additional companies to grow, PE can serve as an invaluable resource to carry out this “buy and build” strategy. With business development professionals on staff, they provide capital, help to identify targets, improve the quality of the transaction evaluation and execution, and accelerate the timeframe for deal completions. PE investors add further value to their portfolio of businesses by offering networking opportunities, a professional peer group, and best practices through the other companies they own.
Lastly, for owners looking to sell amid the current economic uncertainty, PE is open for business. Driven by their fund time horizons, firms have a financial motivation to deploy capital. Management consulting firm Bain & Company recently reported that PE firms had their second strongest year on record last year despite macroeconomic challenges and currently hold $3.7 trillion in liquid assets, or so-called “dry powder” that can be leveraged for deals in 2023 and beyond. Moreover, in more volatile markets, it is common for PE firms to pursue add-on acquisition of middle-market private companies to bolster their existing portfolio companies.
Leaving PE off the table can prove to be a missed opportunity. Owners looking to sell should run a competitive process with a range of suitors that includes PE firms, with an experienced advisor by their side to ensure they identify the right partner and the deal is structured according to their objectives. With careful due diligence and the help of an investment banking partner, business owners can leverage the best attributes of PE to their advantage.