Why the Changes in Private Equity effect Franchise

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Recently, we've been talking about the different types of buyers we work with and how the buyer market has changed during the past few years; some good and some "to be determined".

In this article, we talk about the private equity group (aka PEG) of buyers and what that means to sellers of smaller privately owned businesses like yours.

There's been a lot of news recently about PEGs, mostly in a political and tax related context (e.g., Mitt Romney's success as a partner with Bain Capital and the income tax rate he pays). We'll stay away from that. That's a whole other discussion!

What is a PEG?

They've been around since the 70s starting as larger, "mega" buyout firms (Bain, etc.)

They are investors who have private funds (a combination of personal funds and investor funds) to invest and are seeking alternative investment opportunities (i.e., privately owned businesses) where financial returns can "beat the market"

They buy companies across all industries and usually want a 100% ownership, or at least a majority ownership (51%) in the companies they buy.

They typically buy mature, established companies - not early-stage or startup businesses.

The goal of the PEG is to improve and grow the company with a goal to "exit" their investment in the next 5-10 years, at which time they return the gains to their investors and "close the fund".

What's this mean to you?

Here's the change that's going on. In the last 3 years, we've talked with numerous nationally based PEGs who are investing in smaller privately owned businesses. A typical investment opportunity is a company with:

  • gross revenues of $2-$20M
  • a stable management team
  • a growing industry and
  • an opportunity to either grow or combine a new opportunity with a similar business they already own.

Specifically, the PEGs we've talked to and met with are interested in businesses we represent in the following markets:

  • Health care services
  • Distribution
  • Food Service.

If you are considering selling your business, especially in one of these industries, we believe that, in the right circumstances, PEGs are a legitimate pool of potential buyers that should be considered.

As we've pointed out, the buyer pool is constantly changing and much more diverse than it was 3 years ago.

Today's business seller needs to be more aware than ever of how the pool is changing and what impact this has on potential sales opportunities.

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