Financial buyers are the companies we work with that are typically labeled as private equity (PE), a family office, a hedge fund, etc. In the traditional sense, a financial buyer is primarily concerned with the cash flow generated by a company or asset that they acquire. They think about investment opportunities (clients to us) through the rate of return they can obtain from years of bottom-line enhancement and an eventual resale of the asset at a premium, or much higher valuation, than when they bought it. Like trading stocks, but with more hands-on involvement, they wish to “buy low and sell high.”
There’s a strong chance, however, that many of the buyers you’re likely to see now as a seller in the lower-middle market fit the mold of what I call the “new-look” financial buyer. Your traditional private equity funds, for example, now tout an investment strategy with no timeline for an exit on their portfolio companies. This approach emphasizes the “culture” their respective firms bring to the table for the seller, and in a highly competitive buyer market vying for deal flow, this might make all the difference.
The new-look financial buyer focuses on employee retention, low-cost growth initiatives, management equity rollover, and various other incentives to promote an environment free from the traditional return-over-everything stigma. Go to the “About” or “Approach” section of many of these firms, and I am willing to bet you’ll see words like “collaborate,” “legacy,” “partner”—perhaps even with a chart comparing their firm side-by-side with the traditional PE model to demonstrate explicitly how they’re different. This is especially prevalent in the lower-middle market where our clients are often owner-operated, founder-led businesses cultivated across generations and spanning multiple decades.
A financial buyer must now separate itself from the competition, which is good news for our clients. As mentioned above, time horizons for financial buyers have increased in length as many PE firms now reorient as long-term investors. Many will make it a point to let our clients know they don’t intend to dramatically cut costs (including through personnel changes) as this would directly conflict with the evolving model.
At the same time, financial buyers (i.e., private equity groups and other institutional investors) can be lucrative partners for our clients through a variety of value-adding benefits that they bring to the partnership. These buyers, for example, often bring economies of scale through established and profitable portfolio (“platform”) companies and are therefore able to jumpstart revenue via access to untapped markets or unrealized customers bases. Furthermore, these platforms absorb back-office duties that might have previously slowed down the productivity of key employees, and even owners. Also, while exit strategies have become more relaxed from a timing perspective, financial buyers will not hold the asset indefinitely, and for sellers who maintain equity in the merged company post-acquisition, this means the opportunity to take a “second bite of the apple” upon exit.
When dealing with a financial buyer, be sure to ask some important questions:
This is by no means an exhaustive list. Seller questions to the buyer will, of course, become more specific as the deal progresses. However, the basic questions above are a good starting point and represent the beginning of a potentially meaningful and lucrative journey for sellers considering PE for the next phase of their company’s growth.
Jason Donker
Senior Deal Associate
Benchmark International
T: +1 (813) 898 2350
E: Donker@benchmarkintl.com
Americas: Sam Smoot at +1 (813) 898 2350 / Smoot@BenchmarkIntl.com
Europe: Michael Lawrie at +44 (0) 161 359 4400 / Lawrie@BenchmarkIntl.com
Africa: Anthony McCardle at +27 21 300 2055 / McCardle@BenchmarkIntl.com
ABOUT BENCHMARK INTERNATIONAL
Benchmark International’s global offices provide business owners in the middle market and lower middle market with creative, value-maximizing solutions for growing and exiting their businesses. To date, Benchmark International has handled engagements in excess of $7B across various industries worldwide. With decades of global M&A experience, Benchmark International’s deal teams, working from 14 offices across the world, have assisted hundreds of owners with achieving their personal objectives and ensuring the continued growth of their businesses.
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