Many business owners look for individual buyers or perhaps a similar company to buy their company when the time comes. There is another type of buyer that is out there and aggressive seeking acquisitions – the private equity group (PEG).
PEGs are professional investors that are typically looking to buy low and sell high. Even if they have a sizable fund, they usually leverage their money by using debt as well as their equity. PEGs typically focus on a certain size and type of business so they can use their expertise in that area to help grow and eventually sell the business. Although there are a few out there that have their own money, typically a PEG is run by professional managers, and the money comes from wealthy investors or institutional investors. For example, I once worked for a PEG doing acquisitions, and the money in that case mainly came from a large European insurance company.
Some PEGs prefer to acquire 100% of the company and take over completely from the owner by installing a professional manager, while many prefer to take on a majority interest and continue to let the owner run the company.
Even at the low end (called the middle market or even the lower middle market) PEGs do need a substantial, fairly profitable company in order to make their money work. The magic number seems to be $1 million in adjusted earnings, although there are some that will acquire a company with earnings around $500K or less, especially if they acquire a type of company that is already in their holdings (an “add-on” company).
In the current economy you might expect the PEGs to draw back and wait, but many of these organizations have investors that expect a return on investment in relatively short period of time (3, 5 and up to 10 years). They need to deploy their money and get it working for them or their fund will under-perform, in which case not only do the managers not get paid as much, their investors will eventually want to put their money elsewhere. What has changed is that financing is tighter, and the PEGs can’t leverage their money quite as much as they are used to doing. This does put some downward pressure on valuations, since the PEGs return-on-investment is reduced when not as much debt is used.
So there are PEGs right now that are quite active. I get calls and emails from them often, asking if I have any new companies that we represent that they can look at. Next week I’ll be in Denver for the M&A Source event, and part of that event is a Private Equity Expo where deal makers like myself meet the active PEGs from around the country. I have several new companies we represent that should be of interest to the PEGs. We’ll see how much interest…