Why Sell My Company to a Private Equity Firm?

What is a Private Equity firm?

Private Equity firms, sometimes referred to as PE firms, Private Investment Groups, LBO funds or Buyout firms, raise capital from public and private pension funds, insurance companies, wealthy individuals and other institutional investors seeking high returns. They use that capital to purchase or otherwise invest in private or public companies.

Their affect upon today's market for middle-market businesses has been staggering. According to Thompson Financial, "LBO deals reached $198 billion in 2005, easily the highest (amount spent) on record, and a 43% increase from 2004". In 2000, by contrast, PE firms spent only a fifth of that, or $42 billion. In 2005, buyout funds paid their investors a remarkable 31.3% return. Their three year average return to their investors has been 16.3%. PE spending continued to increase during 2006 accounting for over 13% of the entire M&A (merger and acquisition) market. According to the Private Equity Analyst, through August of 2006, PE firms had raised another $126.8 billion dollars of the $222 billion they planned to raise this year. 

How have these PE buyers affected the value of my company?

All of the new capital that has been committed for investments in U.S. companies has resulted in an increase in the value of most middle market companies across the country and, to some extent now, even in Canada. A seller's market now clearly exists for companies earning over $1 million annually in a broad range of industries. The seller's market is particularly apparent for growing companies with earning exceeding $5 million.         

Why should I sell my company to a Private Equity firm?

Selling or raising equity can be an arduous process. Many business owners hire intermediaries who typically charge substantial upfront fees and who then attempt to sell the company to private individuals or inexperienced strategic buyers. In many cases, these buyers are not experienced in valuing the company, raising the necessary capital, structuring the transaction, conducting their due-diligence, planning for a transition or otherwise working with management. Working with inexperienced buyers or investors can cause the owners of a company to spend a considerable amount of time and money, over and over, in a fruitless attempt to get a deal done.

There is an alternative. There are well capitalized, professional buyers / investors who 1. already have capital, 2. know exactly what they are looking for and what they'll pay for it, 3. know how to evaluate opportunities and 4. know how to work with owners and managers to get deals done. Because of their resources, competence and experience, selling to or raising capital from a Private Equity firm can dramatically increase the chances for a successful transaction.

How do I identify and approach a suitable Private Equity firm?

The most difficult part of accessing the PE market is making an appropriate introduction to a suitable Private Equity investor. By working with Adler & Company, you will have access to the right PE firm for your situation, whether that is one of our current clients or one of the hundreds of other Private Equity investors we can screen and approach on your behalf.         

In contrast to hiring a traditional business broker, intermediary or investment banker, by working directly with a buyer's representative, like Adler & Company, business owners can entirely avoid:          

• Retainers or up-front fees
• Success fees or commissions of any kind
• Long-term exclusivity obligations
• Engagement agreements of any kind

And instead of being "represented" by an intermediary who only gets paid if a deal closes, all business owners we introduce to PE investors are represented by their own experienced transaction legal and financial counsel.

How much is my company worth?

Adler & Company will provide business owners with a preliminary opinion regarding the value a PE firm is likely to place on their company. In general, profitable companies sell for a multiple of their earnings, defined as either Earnings Before Interest and Taxes (EBIT) or Earnings Before Interest Taxes Depreciation & Amortization (EBITDA). Multiples can range from as low as 3 or 4 times EBITDA to over 10 times, depending upon factors such as:

• Industry
• Barriers to Entry
• Customer Concentration
• Strength of Balance Sheet
• Projected growth rate of earnings
• Profit margins (the higher the better)
• Market share / market dominance of company    
• Depth of in-place management team