Dale Heims

Tuesday, 28 June 2005 20:00

Exit options

For the owners of privately-held businesses, selling the business will be one of the most important decisions they'll ever make. After all, owners only get one chance to put a price tag on the years of time and effort poured into their business. In addition to maximizing proceeds, owners typically grapple with issues such as rewarding loyal employees, negotiating their own ongoing role in the company and maintaining the business's legacy in the future.

In today's M&A market, private equity firms are capturing an increasing portion of the overall activity, due to their aggressive pricing and customized transactions that meet business owners' noneconomic goals and objectives.


Historically, an owner wishing to maximize the company's price sold to a strategic buyer that could justify paying a premium amount because of anticipated synergies from staff reductions and merged operations. In addition, the strategic buyer's large size provided access to substantial amounts of inexpensive capital. Meanwhile, sales to private equity firms came mostly from owners willing to accept a somewhat lower price in exchange for a private equity firm's ability to satisfy some of their noneconomic goals.

However, the increase in the number, size and sophistication of private equity firms and their role in the M&A marketplace have changed dramatically. According to Robert W. Baird, between 1998 and 2004, private equity transaction volume increased from 3.6 percent of U.S. middle-market transactions to nearly 18 percent, while the disclosed value of such deals increased from $48.7 billion to $159.7 billion. As the prominence of private equity firms has increased, so too has their access to equity and debt. The need to put this capital to work has resulted in competitive bidding by many private equity firms, mitigating the pricing disparity between private firms and strategic buyers.

Noneconomic benefits

In addition to being aggressive payers, private equity firms also offer a seller other benefits.

More flexible structures. For companies with significant growth and profit potential, a recapitalization -- where the owner sells a majority of the business to a private equity firm for cash, while maintaining an ownership interest -- is an ideal strategic solution. Because a growth-oriented private equity firm seeks to double or triple the size and value of a company during the course of its ownership, when the business is subsequently sold -- typically five to seven years later -- the owner can enjoy another significant payday. The owner's combined proceeds from the two transactions often exceed what they would have enjoyed had they initially sold the entire company.

Business continuity. Often a primary concern for the seller is the company's continuity and its place within the community. A strategic buyer often downsizes a new acquisition and merges it into existing operations. Conversely, private equity firms generally want to retain the existing operations and work force, and even grow the company, leading to new job openings and enhanced career opportunities for employees.

Rewarding loyal employees. Most private equity firms create an equity program to allow key executives to purchase or earn equity ownership in the newly acquired business. In addition, a private equity firm can generally be more flexible in designing performance-based incentives to attract and retain key employees. Providing a financial upside for key employees is a way for owners to say "thank you" for years of hard work and loyalty.

Creating a customized role. Many owners strongly prefer to focus their efforts on activities that they enjoy, but have had to spend years as a "wearer-of-many-hats". For owners who wish to remain with the business post-closing, a private equity firm can provide an owner the flexibility to customize their role and time requirements going forward.

The ability to be more aggressive buyers, combined with the willingness to meet an owner's noneconomic goals and objectives continues to make private equity acquirers an attractive option for many sellers.

Dale Heims is a vice president at Pfingsten Partners (www.pfingstnepartners.com), an operationally oriented private equity firm located in Deerfield, Illinois. Reach Heims at (847) 572-5010 or dheims@pfingsten.com.


Tuesday, 31 January 2006 09:32


For many business owners, the initial attraction of a recapitalization — selling the majority of a business to a growth-oriented private equity firm while retaining a minority — is often based on near-term economic and liquidity considerations. However, while those factors often drive the initial decision, a recap delivers a number of longer-term and noneconomic benefits that make a recap a sound strategic alternative.

Continued business legacy
Most middle-market businesses are prominent cogs in the local community and employees, suppliers and charitable organizations alike benefit from the company’s success. Accordingly, the owner may prefer not to sell the business to a strategic buyer that might shut down the company and merge it into existing operations.

Where the ongoing legacy of the business is a concern, a recap with a growth-oriented private equity firm that seeks to double or triple the business in size can be a perfect solution.

Customized role for the seller
As a business grows, the owner often takes on responsibilities that, although necessary for the business, may be personally less enjoyable or rewarding. Dealing with banks, human resource issues, government agencies and the like can detract from a business owner’s enjoyment.

However, a top private equity firm will work with the business owner to craft a customized professional role that that specifically addresses the owner’s desired responsibilities and level of involvement.

Access to capital
As a business grows to represent a higher percentage of a business owner’s personal net worth, the concentration can result in a conservative investment philosophy which can stall growth. Top private equity firms can eliminate this artificial noose by providing assistance in identifying growth opportunities and ample access to capital to fund sound growth opportunities.

A method to reward loyal employees

In most middle-market businesses, equity ownership is concentrated in the hands of a single or few people. However, a top private equity firm will generally seek to expand the equity ownership much deeper in the organization.

Subsequently, when the private equity firm ultimately sells the business, those employees responsible for helping the company flourish can enjoy a payday of their own.

Access to additional management resources
One of the noneconomic benefits of collaborating with a private equity firm is the access these firms offer to managerial resources that may help a business evolve to the next level. Private equity firms are staffed by veteran business professionals with experience in helping companies to expand and succeed. These individuals can help businesses in many ways.

  • Capitalize on global sourcing and distribution opportunities. Many middle-market companies don’t have the scale necessary to capitalize on global sourcing and distribution opportunities, and those that do often lack the expertise. By teaming up with a private equity firm with existing capabilities, the company can immediately access markets or suppliers previously unavailable.

  • Develop and execute a long-term growth strategy. Top private equity firms will seek to double or triple the size of the business during their ownership. A private equity firm’s experience in capitalizing on internal growth opportunities and executing strategic acquisitions can help a business achieve a level of size and durability greater than is often achievable by a single owner.

  • Enact growth-oriented strategic acquisitions. The professionals at private equity firms make a living by identifying and completing acquisitions that increase the company’s competitiveness, size and profitability.

This creates value in a couple ways. First, because smaller, strategic add-on acquisitions can often be purchased at relatively lower valuations, they can be instantly accretive to the value of the existing business. Second, the revenue and cost synergies between the two companies result in a combined company worth more than the two stand-alone companies.

A recapitalization offers business owners the ability to achieve both near- and long-term economic goals, and provides access to the fiscal, managerial and strategic resources that will help entrepreneurs grow and improve their businesses.