1 - Peg

10/26/2019 Selling Your Business To A Private Equity Group Is Not For Everyone - Here's Why
12,728 views | Nov 1, 2016, 4:31 pm
Selling Your Business To A Private Equity Group Is Not For

Everyone - Here's Why
Richard Parker Contributor
Entrepreneurs
I cover every aspect of buying and selling small businesses
This article is more than 2 years old.
I have represented several business owners in the sale of their companies to a Private Equity
Group (PEG). In every case except one, the outcome was nothing short of phenomenal for the
owner, and the one negative transaction was the result of a seller not holding up their end of
the deal. However, unlike a full exit in a traditional business for sale transaction, sellers have
to understand that this type of deal is almost always a two-step process that requires their
ongoing involvement.
A PEG will acquire a percentage of the business (usually a majority stake) which allows the
owner to take some chips off the table, but requiring them to remain on board to operate and
grow the company with the PEG’s resources behind them for a future, more lucrative valuation
and exit.
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This two-step approach only works when the owner is fully committed to continuing to
operate the business and has the drive to scale it. Shaun L. McGruder, is the Partner and Co-
Founder of Palm Beach Capital, a $400 million PEG based in Florida. Since its funds inception
IIM Calcutta Entrepreneurship
in 2001, his firm has acquired forty-one
OPEN
6 months entrepreneurship programme by IIM
companies. Mr. McGruder notes, “a business owner
Calcutta. Hughes Global Education
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has to understand that the ultimate plan is for their now minority share to ultimately be worth
far more than their 100% ownership would be if they tried to go it alone.” The new
partnership’s strategy for growth is paramount as Mr. McGruder further comments that “our
plans for the future have to be perfectly aligned with the owner.”
In a deal breakdown where a PEG may, for example, acquire 70% of a business with a total
enterprise value of $20 million, the owner does not just get a check for $14 million. The deal
will provide the seller with a handsome and immediate payday, but not enough for them to
give up their enthusiasm for the business. The remainder will go in as debt and/or equity. “We
want their remaining equity to be significant and important to their net worth and lifestyle,
but they have to remain tied to the business” Mr. McGruder explains.
IIM Calcutta Entrepreneurship

6 months entrepreneurship programme by IIM OPEN
Calcutta. Hughes Global Education
When Lamar decided to sell his $35 million transportation products manufacturing business
to a well-known PEG, the business was generating just over $3 million in EBITDA. Due to the
nature of the industry, he always faced an ongoing receivables battle. Although he had, over
the years, identified numerous growth opportunities such as increasing his plant size,
acquiring additional equipment or buying out competitors, the collections restricted him from
ever taking any big leaps. When he decided to market the business for sale, he received offers
ranging from $12 – $14 million for the entire company. A PEG presented the ideal opportunity
for him to cash in for his hard work, and also have access to growth capital to build the
business to where he was confident it could go.
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The PEG’s business valuation came in at $18 million and they acquired a 60% stake. Over the
next four years, Lamar leveraged their resources and the growth was exponential, increasing
revenues to over $100 million, which also allowed for greater efficiency and a commensurate
increase in gross margins. EBITDA grew to over $13 million and the business got sold to a
mammoth player in the industry for $98 million. Lamar sailed off into the sunset with $39
million in cash. Sounds pretty good doesn’t it?
The sale of a business, regardless of the buyer, is a major decision for the owner but especially
so if it does not involve a full exit. Clinton Lee, Founder of The Exit Firm, a UK-based company
that matches owners with business brokers that are best suited to their goals, suggests that “a
seller should look at the PEG’s track record and that sellers can ask to speak with owners of
previous companies the PEG has acquired.” He also warns that “a PEG with over-ambitious
plans to expand the business may overstretch the business and so the vendor may prefer a
non-PEG buyer instead.”
So why should a business owner consider selling to a PEG rather than an outright sale to a
competitor, complimentary business or individual? First, the actual sales process is generally
easier. The mandate of a PEG is to buy businesses. Their funds expire, usually in ten years,
which means they have to get in and out of deals within that time frame and then liquidate the
fund to its investors. While never reckless, PEGs are inherently more comfortable with risk; it
is part of their business – they deal with it every day. Think of it as their Cost of Goods Sold.
They understand that not every deal will be great. Conversely, a strategic or individual buyer
usually cannot afford to make any mistakes. Often, a large part of their entire equity or
personal net worth may be tied to their prospective investment in the business. It is usually
more difficult for them to close the deal based upon normal fears alone compared to a PEG.
It is important to note that PEGs are not operators. While they will provide experience, ideas,
human capital, deal structure acumen and financial resources to help grow the business, they
are not involved in the daily functions. They let the owner do their job. They are betting on the
jockey, not the horse.
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According to Matt Slappey, a mergers and acquisitions adviser in Atlanta, “the best private
equity partner has already identified a few ways to help a company get to the next level. This
could be through their previous or current investment in a business in a similar industry, the
ability to assist the company in areas that could be lacking internally, or any other functional
area that will improve the company’s performance.”
What do PEGs look for in a business? Each group will have its own set of criteria regarding
EBITDA levels and industries. Although, at present, deal flow has slowed down considerably.
This has had two opposite effects. Many PEGs have lowered their EBITDA level criteria, while
others, like Mr. McGruder’s Palm Beach Capital fund, has actually raised its minimum
EBITDA level to $5 million.
Inundated with around one hundred business profiles each month at his firm, the first things
Mr. McGruder looks for in a business are “what is it exactly, is it an industry or sector we want
to be in, as there are several that are of no interest to us.” Next, says McGruder, “is a full
review of their financials – revenues, gross margin and EBITDA and most importantly, the
historical sales growth.”
Messrs. McGruder and Slappey both agree that customer concentration issues are a major red
flag, which is a great lesson for business owners – expand your customer base!
In Mr. Slappey’s experience, PEGs want:
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IIM Calcutta
Entrepreneurship
6 months entrepreneurship
programme by IIM
Calcutta.
Hughes Global Education
A healthy company that is profitable in an industry that appears stable or growing.
A company with a management team and/or an owner that is not completely tied to the
business and customers in a way that can damage the company upon their departure.
A business that can grow either through expansion of gross margins, acquisition of other
companies, or the addition of new business.
A company that will be saleable in 5-7 years when it is time to exit.
Mr. Lee advises sellers to shop around. “The value of the business to one PEG may be very
different to the value it represents to another. Finding a PEG that has a sector specialization
for example, could be advantageous as their portfolio includes other businesses in the same
industry thus providing potential for synergies and for value to be derived beyond what a
purely financial player would pay.”
The advent of PEGs, and the increase in the number of them, has been a boon to business
owners who fall into their scope of targeted industries and financial criteria. It is essential
however, that any owner considering this route understands that it is a two-step process and
they will suddenly have partners, albeit non-operational ones. On the flip-side, they get a
partner who can provide all of the resources to grow the business substantially and that can be
quite enticing. For owners who truly believe in their business, want to cash in short term, and
want to keep working at it with the ultimate goal of a very lucrative payout, selling to a private
equity group can be the ideal pot of gold at the end of the rainbow.
Get the best of Forbes to your inbox with the latest insights from experts across the globe.
Check out my website.
Richard Parker
I am the President of Diomo Corporation - The Business Buyer Resource Center. My entire
career has been dedicated to advising and mentoring people who want to buy or sell…
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10/26/2019 Selling Your Business To A Private Equity Group Is Not For Everyone - Here's Why

12,728 views | Nov 1, 2016, 4:31 pm

Selling Your Business To A Private Equity Group Is Not For

This article is more than 2 years old.

Singapore Business Formation - Open

IIM Calcutta Entrepreneurship

1. START A BUSINESS ONLINE a

2. SMALL BUSINESS TO START a

3. PART TIME JOBS a

4. MATTRESS FOR BACK PAIN a

5. START YOUR OWN BUSINESS a

In Mr. Slappey’s experience, PEGs want:

Hughes Global Education

A healthy company that is profitable in an industry that appears stable or growing.

A company that will be saleable in 5-7 years when it is time to exit.

Check out my website.

Also on Forbes Exit Strategy

Grads of Life BrandVoice: “Talent Is Equally Distributed, But Opportunity Is Not.”

Save $400 On The Ultra-Portable HP Envy x2 Laptop

© 2019 Forbes Media LLC. All Rights Reserved.

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