Private equity refers to buyout groups that seek to acquire ongoing, profitable businesses that demonstrate growth potential.
The private equity market has traditionally been restricted to acquiring larger companies. But increased competition for those larger operations, greater growth potential for smaller firms and an easier path to exiting the investment in the future have played a role in attracting PEGs to smaller companies. Many firms are now acquiring businesses in what is called the middle market, or lower middle market.
PEGs are typically organized as limited partnerships controlled and managed by the private equity firm that acts as the general partner. The fund invests in privately held companies to generate above market financial returns for investors.
The strategy and focus of these groups varies widely. Some prefer complete ownership, while others are happy with a majority or minority interest in acquired companies. Some limit themselves geographically while others will buy anywhere in the U.S.
PEGs also tend to have certain things in common. They typically target companies with relatively stable product life cycles; avoid leading-edge technology (what venture capitalist want); and have a preference toward stable and established product lines or services. Most prefer a qualified management team that will continue to run the day-to-day operations while the group’s principals closely support them on the board of director level.
Private equity buyouts take many forms, including:
Outright sale: This is common when the owner wants to sell his ownership interest and retire. Either existing management will be elevated to run the company or management will be brought in. A mid-term transition period might be required to train replacement management and transition key relationships.
Employee buyout: PEGs can team up with key employees in the acquisition of a company in which they play a key role but don’t own. Sellers can receive an all cash price because PEGs tend to not rely on seller financing. Key employees receive an equity stake while retaining operating control.
Family succession: This type of transaction often involves backing certain members of family management in acquiring ownership from the senior generation. By working with a PEG in a family succession transaction, active family members secure operating control and significant equity ownership, while gaining a financial partner for growth.
Recapitalization: This is an option for an owner who wants to sell a portion of the company for liquidity while retaining equity ownership to participate in the company’s future upside potential. This structure allows the owner to achieve personal liquidity, retain significant operational input and responsibility, and gain a financial partner to help capitalize on strategic expansion opportunities.
Growth capital: Growing a business often strains cash flow and requires access to additional working capital. A growth capital investment provides access to capital and permits management to focus on running the business without constantly having to be concerned with cash flow matters.
DAVID YEZBAK IS THE OWNER OF SUNBELT BUSINESS BROKERS IN AUGUSTA AND COLUMBIA.