Capitalizing on the Perfect Storm
- 2003: $94 billion
- 2004: $137 billion
- 2005: $200 billion
- 2006: $320 billion
- 2007: $454 billion
SOURCE: Buyouts, January 7, 2008; Issue 1
What factors are driving this activity? For starters, both the general economy and individual companies have performed better, compared to the doldrums of 2001 and 2002. Banks became more flexible, and lending policies more relaxed, so buyers were able to use less of their own money to fund transactions, potentially yielding better returns on their investments. In addition, between 1999 and 2002, private equity funds continued to raise money, even though relatively few deals were completed. Most private equity firms have a 10-year window during which to invest dollars, operate an organization, sell it, and return dollars to investors. Therefore, once the economy improved in 2003, there was a surplus of dollars available that forced private equity firms to invest their funds. A perfect storm of sorts developed with ready capital to fund deals at a relatively low cost, a lot of buyers in the market, and the general economy performing well. The markets tipped toward sellers and remain so today in the middle market.What Does This Mean to You?
Owners planning for business succession —particularly in the distribution, service, non-automotive manufacturing, or medical and surgical industries — now have another option versus the typical sale to a strategic buyer. Merger and acquisition activity tends to run in three- to five-year cycles; 2008 is the beginning of the fifth year of the latest up-cycle. Therefore, if an owner is looking to exit a business in the next one to three years, now may be a good time to consider going to market.
Selling to a private equity firm affords company owners benefits not generally realized when selling to a strategic buyer. The most significant is retention of a meaningful share of the business — typically 20 to 40 percent — allowing owners to monetize some of their net worth wrapped up in the business yet still manage it day to day.
What Do Private Equity Groups Look For?
In a word, sustainability. The greater your cash flow — and potential for future cash flow — the more attractive your organization will seem. It’s important to have products and services for which there’s strong market demand, desirable customers, a diversified customer base, and a strong management team to run the company during the next phase of ownership.
Act Before the Perfect Storm Clears
Economic indicators suggest the private equity market will remain attractive throughout 2008. Private equity firms can offer an additional — and very attractive — option for owners considering a sale of their businesses.
