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Go Where the Money Is!

September 05, 20233 min read

How to Put Your Company 

in the path of the Buyers with the Greatest Purchasing Power

There are more Private Equity Groups (PEGS) active in the market for closely-held businesses than days of the year.  Depending on how you define and count these investors, there are now over 1,500 active professional participants in the US private middle market. 

Most Private Equity Groups has preferences for investments in specific industries.  This is their first screen. The target industries for the more active PEGs is well know within the merger and acquisition community.  Part of the service provides by top middle market acquisition advisors is effective representation of client divestures to multiple groups who they know will have a high level of interest.  In addition to access through advisors, there are websites that provides a searchable fee-for-information data base. 

These investment groups are sophisticated buyers with billions of dollars to spend to acquire closely-held companies. But they have a big problem, they have far more capital than workable deals.  They cannot find enough companies that fit their acquisition criteria to effectively deploy all of their available capital. (This problem is greatly increased in times of economic distress when few companies are developing any noteable measure of financial performance.) They are frustrated and hungry, but they are disciplined. They have a very strict minimum size company criteria for initial investment in a market segment.

They are however, a little more flexible with “add-on” businesses once they have purchased a larger “platform” company in a market segment. While the criterion varies between investment groups, “platform” company requirements are typically as follows:

Minimum Revenue $15,000,000 to $50,000,000

Minimum EBITDA $ 2,000,000 to $ 5,000,000

Annual Growth Prospects of 10%

Note: EBITDA = Earnings before Interest, Taxes, Depreciation and Amortization. These are adjusted Earnings to put the company on par with the financial reporting required in public companies. (i.e. all excess owner's compensation or benefits, non-recurring income or expenses, etc. are "adjusted to market values" and reflected in adjustments to reported earnings.)

Add on companies normally fall into the following range depending on the individual investment group's restrictions:

Minimum Revenue $ 5,000,000 to $10,000,000

Minimum EBITDA $ 1,000,000 to $ 2,000,000

Does this mean that if you are not at or near the minimum revenue or profitability that you are excluded from ever being considered by these buyers? No you can become a candidate for these well-healed buyers if you work at it. You simply must move your company effectively and efficiently toward these goals. (You maybe much closer than you think.)

For example: If your business is now producing sales of $3.5 million with EBITDA of $280,000 (8%), what will it take to reach the various thresholds. The key is to focus on both revenue growth and margin growth. A combination of small growth rates in these business components will quickly move you toward the revenue goal and EBITDA goal.   It is important to remember that:

Revenue doubles in 5 years at a growth rate of 14.2%

If you can improve gross margins, by just 2 to 4 % while maintaining operations growth, the current EBITDA/revenue relationship could increase to 10 or 12%.  Achievment of EBITDA of 12% on just over $8.0 million in revenue clears the required EBITDA threshold of $1 million. But if strategic changes could improve EBITDA to the 15% range, the company would be approaching $1 million EBITDA on less than 7.0 million in revenue. Moving aggressively toward this strict statistical hurdle provides a bonus. Several years of above average growth in revenues coupled with improved operating margins will make these buyers much more flexible.

Can this be done?

Yes it can...with desire, commitment, and a vigorous focus on effectively planning and executing operational strategies. But, beyond the clear benefit of positioning your company for acquisition by financially stable buyers, you will have dramatically improved year to year earnings for you and your family.

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Richard Mowrey

WSJ and USA Today Best Selling Author

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