There are increasing signs of a recovering U.S. economy and record setting amounts of capital sit in the hands of large corporations (“strategic buyers”), Private Equity firms (“PE”) and hybrid investors (neither strategic nor PE, for example wealthy individuals and family offices). Private business owners contemplating a sale are fortunately faced with a myriad of options. Add to these traditional middle market lenders, commercial finance companies and Business Development Corporations (BDCs) all flush with cash, it is no wonder that many company owners are confused and uncertain as to how to maximize the exit value of their business - or take some money off the table.
Middle Market PE Is Growing
The middle market, which we define as companies with $10 million to $500 million in revenue, has long been the predominant area for U.S.-based PE investment. And while deal volume and capital invested in U.S.-based middle market companies were down somewhat in absolute terms in 2012, the middle market expanded to 71.4% of total buyout activity - its highest share in the last decade.
PE Buyers
PE buyers generally want to purchase at least 80% of the company and will provide capital for growth. Typically, the PE buyer will target a 5-7 year exit of the business and will quite often resell the company to another PE firm. They will most often want to keep or at least be open to keeping a founder involved for a period of years to lead the execution of a growth strategy and to “earn out” part of the purchase price.
Strategic Buyers
Strategic buyers are actively acquiring smaller companies in order to gain technology, market share, products or people. Think Instagram with 13 employees by Facebook for $1 billion dollars. A strategic buyer will pay the highest price for an acquisition that when added to the buyer’s business is “accretive” i.e. creates more value for the whole. In the world of M&A, accretion is the “magic” that makes 1+1=3.
And lastly, the emergence of family wealth looking for good investments has provided additional tail wind for middle market M&A--as was the case of the acquisition of Peet’s Coffee by the German company Joh. A. Benckiser for $974 million (22 times EDITDA), a significant premium over the traded value of Peet’s.
Michael Evans is Managing Director of the Northern California practice of Newport Board Group. Learn more or contact Michael here.
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