Private Equity is Desperately Seeking Family-Held Businesses by Jonathan Brabrand

Our firm recently attended the Association for Corporate Growth’s annual InterGrowth conference in Orlando, FL, which is one of the largest gatherings of middle market deal professionals in the country. Over 1,500 attendees convened from all sides of the deal-making world, including debt and equity capital sources, investment banks, and service providers such as accountants, consultants, and diligence firms.

My focus was on the over 350 private equity attendees, and I was able to sit down with over 45 in one-on-one meetings over the course of the two-day conference. Despite some differences in terms of the specific profile of companies they seek to invest in, they universally shared one common trait:

Middle market private equity groups are desperately seeking high-quality, family-owned businesses with which to partner.

I heard this refrain over and over again, from PE firms large and small. While they have plenty of chances to invest in portfolio companies being sold by other PE shops nearing the end of their investment cycle, the real opportunities live in the land of the family-held business.

The rationale here is simple and true – there is more potential growth in a family-held business than in one that has already completed at least one round of private equity investment. There is a rush to be the first to apply a PE firm’s growth-enhancing strategies, including capital infusions for tuck-in acquisitions or capital expansion, access to outside Board members to help drive corporate strategy, and additional operational expertise to improve profitability. Don’t get me wrong, there will still be meaningful growth opportunities left for subsequent PE providers in a company’s lifecycle, to be sure, but the law of diminishing returns will start to set in at some point. The Low-Hanging Fruit will have already been picked.

And so, reminded of this pent-up demand by PE shops, I returned to Richmond with a renewed vigor to share the benefits that private equity firms can offer to the family-held business owner, such as:

1. Diversifying the business owner’s personal wealth by selling a portion of their business to a PE sponsor and putting the sale proceeds into their pocket
2. Obtaining a deep-pocketed financial partner with additional capital available to support organic growth and/or acquisitions
3. Allowing the existing management team to retain operational control and maintain the company’s culture and identity
4. Gaining access to the PE partner’s business networks and operational expertise to open new doors for expanding the business
5. Creating an opportunity for additional future wealth by selling the rest of the business when the PE firm exits, creating a “second bite of the apple” for the business owner

For more information on the mechanics of how private equity investments work, please see my article entitled “Raise Capital and Retain Control.”

A logical follow-up question would then be: What characteristics are PE shops looking for in family-held businesses? Does my company fit the bill?

10 Business Characteristics That Attract Private Equity Shops

In our experience, PE firms are particularly excited about investing in companies that generate at least $2 million of pre-tax earnings and have certain fundamentals in place, including:

1. Solid, proven management team that will lead the company after the principal(s) exit
2. Significant and quantifiable opportunities for growth, organically and through acquisition
3. Five-year strategic projections and three-year look-back showing defensible margins, consistent growth, and prudent capital expenditures
4. Defensible market position in an attractive, sizable, and growing industry sector
5. Clear customer value proposition and competitive advantages
6. Customer and supplier diversification (no account more than 25% of revenue or purchases)
7. Proven marketing ability to both external and internal audiences
8. Clean and assumable contracts and leases
9. Reliable reviewed or audited financials for at least three years from a reputable CPA firm
10. Professional set of daily flash reports and monthly and quarterly reporting packages

If you own a family business and are interested in learning more about whether private equity would be a good avenue for you to explore, Fahrenheit’s M&A advisory team can help. 

There is an over-abundance of PE capital-seeking quality businesses. 

We can help you and your company get ready for a private equity investor and then create and execute an M&A process targeting those PE firms that can help you achieve your goals.

About the Author

Jonathan Brabrand is a Managing Director at Fahrenheit. He is passionate about helping businesses prosper and maximize value to their employees, customers, communities, and owners. Instilled with a spirit of entrepreneurism from a young age, Jonathan draws on his experience as a business owner, trusted strategic advisor, and investment banker to identify and overcome the challenges clients face.