Mergers & Acquisitions: The Usual Suspects – Part 2
Part 2: The strategic, financial, and “hybrid” buyer.
In the first installment of this three-part series, a discussion regarding the typical types of buyers you’ll run into when you’re selling your business, we covered Strategic/Industry buyers. Let’s discuss the next: Financial buyers.
The Financial Buyer
The financial buyer comes in a variety of forms. The most common is a private equity group (“PEG”). PEGs pool other people’s money with a promise of adequate returns. Pension funds, insurance companies, wealthy individuals, etc. engage in these investments because they offer a different return to risk profile – returns which can be significantly above the stock market (20%+ IRR). PEGS provide capital (usually in the form of equity) to private businesses (hence the name: “private” and “equity”). PEGs are considered a higher risk asset class in the financial world; an illiquid investment in businesses who are generally smaller and subject to less oversight than public companies. Additionally, before the private equity moniker became commonplace, these firms were known as leveraged buyout shops (LBOs). LBOs got a bad name along the way for ruining businesses with too much debt, but make no mistake about the new name — debt is almost always part of the equation to help PEGs improve returns. This can be both good and bad.
We’ll also group hedge funds, wealthy families who have investment arms (AKA family offices), and high net worth individuals in this bucket of buyers, because directionally they’ll act the same and the pros and cons are similar.
Pros of doing a deal with financial buyers:
1. These are professional deal-makers, which is a good thing. Take it from us: It is nice to have folks in a deal who understand how to handle a transaction. You may or may not like their answers, but chances are these folks will be very deliberate.
2. A chance to make more money than you would in a straight sale. Financial buyers love when an owner is willing to “roll” some of their proceeds into a deal with them. Selling a portion of your business is referred to as a recapitalization; a way to simultaneously reduce risk and get you some valuation upside. We refer to this in the deal world as “taking chips off of the table,” while getting “two bites at the apple.”
3. Can help you grow your business. Financial buyers have access to capital, can help you expand via acquisition, lower your cost of capital, maximize your capital structure, and bring professional management skills to the table. Smart ideas combined with hard work and the right capital/partner is what makes huge successes. US LBM Holdings, case in point.
4. Can turbo charge your culture. A deal with a financial buyer means an investment in your executive team and your business. The last thing they want to do is mess up what you’ve created, and hence this type of buyer can be more sensitive to your culture than industry buyers have demonstrated in the past. Will there be hiccups? Of course. But if you want someone to finance your vision—a financial buyer may be the right path for you.