Is your Closely Held Company a Strong Candidate for Private Equity Acquisition?


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Competition among Private equity (PE) firms and the creation of smaller PE firms have opened opportunities for smaller businesses to be acquired. Just a few years ago, if your EBITDA was less than $5 million, the PE firms would move on.  Today, the benchmark is at $3 million. And sometimes even less.

PE firms look for certain characteristics in potential targets.  Like your business, every investment a PE firm makes is unique.  Successful private equity targets look for these target company acquisition characteristics.

  1. Strong Management Team:
    • A capable and experienced management team is crucial. Private equity firms look for teams that have a track record of successful leadership and a clear vision for the future.
  2. Stable Cash Flow:
    • Consistent and predictable cash flow is attractive to private equity investors. It provides a foundation for steady returns and helps service debt taken on during the acquisition.
  3. Growth Potential:
    • Private equity investors seek companies with significant growth potential. This can come from expanding market share, entering new markets, introducing new products/services, or improving operational efficiency. It may come from synergies with other companies the PE firm has an ownership interest in.
  4. Scalability:
    • Businesses that can scale efficiently are often more attractive. This scalability may come from the ability to increase production without proportionally increasing costs or the potential for geographic expansion.
  5. Market Position:
    • A strong competitive position within the industry is desirable. Private equity firms may target companies that are leaders or have the potential to become leaders in their market segments. Smaller businesses often serve a market niche the goliath competitors cannot.  While this will increase profits and market share, it may be undesirable to a buyer.
  6. Clear Exit Strategy:
    • Private equity investors are interested in companies with clear and viable exit strategies. This may include the potential for an IPO (Initial Public Offering), a strategic sale, or another form of exit that generates a profitable return.
  7. Operational Efficiency:
    • Efficient operations and effective cost management contribute to a company’s attractiveness. Private equity firms often seek targets where they can implement operational improvements to enhance profitability.
  8. Attractive Valuation:
    • The purchase price and valuation of the target company are critical considerations. Private equity firms aim to acquire businesses at a reasonable valuation to maximize potential returns.
  9. Adaptability and Innovation:
    • Companies that can adapt to changing market conditions and innovate in response to industry trends are often favored. Private equity investors look for targets that can stay ahead of the curve.
  10. Clear Corporate Governance:
    • Private equity firms prefer companies with strong corporate governance structures. This includes transparent financial reporting, effective risk management, and adherence to ethical business practices.
  11. Limited Capital Expenditure Requirements:
    • Targets with lower capital expenditure needs are often preferred, as this allows for more flexibility in allocating resources for growth initiatives or debt repayment.
  12. Favorable Industry Trends:
    • Private equity firms may target industries with positive growth trends, as this can contribute to the overall success of the investment.

How does your company fare?  This may be the opportune time to make needed changes… changes that may drive positive changes in the future value of your company and the cash flow to you today.

It’s important to note that these characteristics may vary depending on the investment strategy of the private equity firm, the industry in which the target operates, and the economic conditions at the time of the investment. Additionally, the success of a private equity investment often involves collaboration between the private equity firm and the management team of the target company.