Private Equity

Legal matters, business strategy, and life perspectives from the mind of a non-attorney.

 

The business model of a private equity firm is easy enough to understand. Right?

Per Investopedia.com: “Private equity is composed of funds and investors that directly invest in private companies, or that engage in buyouts of public companies, resulting in the delisting of public equity. Institutional and retail investors provide the capital for private equity, and the capital can be utilized to fund new technology, make acquisitions, expand working capital, and to bolster and solidify a balance sheet.”


Uhhh… What?

Don’t worry, I got your back.

 

Here’s how it all begins: A group of individuals (collectively, the PE firm) raise money by presenting an investment strategy to other companies (financial institutions, for example) and wealthy individuals.

 

Once money is raised, the investment period closes. The PE firm takes the money they raised and – following the core investment strategy – buys businesses.

 

Once a business has been purchased, the firm uses their expertise to manage the business for a period of time (5-ish years) before selling it (either back to the management team or to an entirely new party). If they’ve done their job successfully, the value of the business has grown, and they have a net profit to take home to their own investors.

 

*PE Firms usually want to buy a majority stake (over 50%) in the businesses they acquire. Why? Simple: They want to call all shots.

 

Example:

XYZ Equity is a new PE Firm. Their core investment strategy includes the following:

  • Industries:
    • Niche manufacturing
    • Business services
    • Food processing and packaging
  • Company Characteristics:
    • Enterprise values ranging from $5 to $50 million
    • Stable and consistent cash flow
    • Midwestern location or focus

XYZ Equity conducts multiple presentations of this core investment strategy in front of potential investors. Thanks to the soundness of their strategy and the experience of their consultants, they raise $10 million in the initial round.

XYZ Equity goes shopping for companies that meet their criteria.

XYZ Equity buys a 100% stake in AB Drilling, Inc., a niche manufacturer of Deep Sea Drilling Equipment in central Indiana, for $3.5 million.

It’s an ideal acquisition for XYZ Equity, because one of their senior consultants previously owned a profitable heavy-equipment manufacturing company, and two more of their consultants have extensive engineering backgrounds.

Over the course of 2 years, XYZ Equity invests another $1.1 million to grow the company, and successfully flips it to a competitor for $7.6 million. A $3 million gross profit!

 

Appealing to a Private Equity Firm

 

So that’s all fine and dandy, but the real question is… How do you – the small business owner – take advantage of Private Equity as a resource to sell your company?

It depends.

All of these PE firms are looking for something a little different.

Lucky for you, I did the research. Here are the criteria for six PE firms that work with Wisconsin businesses:

 

Mason Wells

Lubar & Co

Progress Capital Group

Lakeview Equity

PS Capital Partners

Blackthorne Partners

Minimum Size

$5 million EBITDA

$5 million EBITDA

$500k EBITDA

$5 million Enterprise Value

$10 million Annual Revenue

$1 million EBITDA

Geographic Focus

Midwestern US

Midwestern US

Within 2 hours of Milwaukee, WI

Midwestern US

Upper-Midwest US

Southeastern WI

Facilitate MBO?

Yes

Yes Yes Yes Yes

Yes

Will Accept Minority (<50%) Ownership Stake?

No

Yes No Yes Yes

Yes

Industries:            
   Building Products

X

X     X

   Construction  

X

       
   Consumer Goods

X

X

 

X

X

 
   Energy

X

X

X

     
   Engineering

X

X

     

X

   Financial Services

X

X X X

 
   Food

X

X   X

X

 
   Healthcare Products

X

X

X

     
   Healthcare Services

X

X

       
   Niche Manufacturing

X

X X X X

X

   Packaging

X

    X

X

 
   Real Estate            
   Retail            
   Specialty Distribution

X

  X X  

X

   Specialty Services

X

X X X X

X

 

*Keep in mind that these are general guidelines. In many cases, PE firms have the ability to remain flexible with their investment criteria. It is recommended that business owners contact a PE firm directly to discuss any potential investment opportunity.

 

Meeting the initial “screening” criteria of a Private Equity firm is just the beginning. Moreover, ALL Private Equity firms are seeking companies that meet the following requirements:

  • Strong, experienced management team
  • Positioned for future growth
  • Limited customer concentration
  • Non owner-dependent
  • Competitive advantages
  • Solid strategic vision
  • Stable financial history
  • Quality reputation
  • Realistic expectations

 

Epiphany Law’s Exit Planning Program is designed to prepare a business for sale. It is designed, specifically, to help a business become more attractive in the eyes of a 3rd party buyer – like a Private Equity firm! It addresses each of those ^ criteria, and many more.

 

Your first step is completing a State of Readiness assessment, which offers an unbiased opinion on the preparedness of YOUR COMPANY for a transition / sale. If you’re ready, great! Keep up the good work until it’s time to hit the ‘eject’ button. If you aren’t, we will recommend ‘next steps’ to get you where you need to be.

Give us a call or shoot me an email if you have more specific questions!

Thanks for reading! To subscribe to our weekly content, you can enter your email on our homepage. You can also follow me on Instagram (@kelton.official), where I regularly post links to new blogs, as well as random pictures of my life.

Leave a Reply