By Mark Borkowski
By Mark Borkowski
For private equity groups, there is lots of money, but no deals available in the vending industry. At this time, there is more money in the system than anyone can imagine. But there’s also a shortage of vending companies to acquire and good projects to invest in.
The theory that the baby boomers are selling their companies has proved false. Capital investment firms are seeking established vending companies to invest in or buy. The institutional investment and high-net-worth communities are crawling over each other to find projects.
It is being reported that since 2001, 84,000 vending kiosks have closed in the U.S. Private equity groups (PEGs) have not been hard-hit by the credit crunch or the past rocky stock market. They have capital to invest and are looking for business acquisitions and investments. One of the major market shifts for the acquisition of privately held companies has been the growth in the number of PEGs over the last decade. These organizations number in the thousands in both the U.S. and Canada. These PEGs are “buyout groups” that seek to acquire or invest in ongoing, profitable businesses that demonstrate growth potential.
These firms generally manage money for insurance funds, pension funds, charitable trusts, and sophisticated investment groups. They have money to invest. Despite the downturn in the Canadian economy and the industry in general, the buyout and investment market for Canadian companies remains hot. Even early-stage businesses are being sought out.
PEGs have become key players in business acquisitions. They offer flexibility as a liquidity source, giving entrepreneurs the ability to take some cash off the table, recapitalize their company, or simply sell and move on.
The private equity market traditionally was restricted to acquiring or investing in large companies. Increased competition for those large operations, the greater growth potential of smaller firms, and an easier path to exiting the investment in smaller firms in the future have all played a role in attracting PEGs to smaller companies.
PEGs are typically organized as limited partnerships controlled and managed by the private equity firm that acts as the general partner. The fund invests in privately held companies to generate above-market financial returns for investors.
The strategy and focus of these groups’ investment philosophies and transaction structure preferences vary widely. Some prefer complete ownership, while others are happy with a majority or minority interest in acquired companies. Some limit themselves geographically, while others have a global strategy.
PEGs also tend to have certain things in common. They typically target companies with relatively stable product life cycles and a strategy to overcome foreign competition. They avoid leading-edge technology (this is what venture capitalists want) and have a preference for superior profit margins and a unique business model with a sustainable and defensible market niche.
Other traits that appeal to PEGs are strong growth opportunities, a compelling track record, low customer concentrations, and a deep management team. Most prefer a qualified management team that will continue to run the day-to-day operations while the group’s principals closely support them on the board of director level.
Private equity buyouts and investments take many forms, including the following:
Outright sale: This is common when the owner wants to sell his ownership interest and retire. In this instance, existing management is elevated to run the company or new management is brought in. A transition period may be required to train replacement management and provide for a smooth transition of key relationships.
Employee buyout: PEGs often partner with key employees in the acquisition of a company in which they play a key role. Key employees receive a generous equity stake in the conservatively capitalized company while retaining daily operating control.
Family succession: This type of transaction often involves backing certain members of family management in acquiring ownership from the previous generation. By working with a PEG in a family succession transaction, active family members secure operating control and significant equity ownership, while gaining a financial partner for growth.
Recapitalization: This is an option for an owner who wants to sell a portion of the company for liquidity while retaining equity ownership to participate in the company’s future upside potential. This structure allows the owner to achieve personal liquidity, retain significant operational input and responsibility, and gain a financial partner to help capitalize on strategic expansion opportunities.
Growth capital: Growing a business often strains cash flow and requires significant access to additional working capital. A growth capital investment permits management to focus on running the business without constantly having to be concerned with cash flow matters.
PEGs have become a major force in the acquisition and investment arena. They also can be thought of as strategic acquirers in certain instances, when they own portfolio companies in your industry or a related area that addresses the same customer base. These buyers may be in a position to pay more than an industry or strategic buyer that does not have this financial backing.
Mark Borkowski is president of Mercantile Mergers & Acquisitions Corp. Mercantile is a mid-market M&A brokerage that sells mid-market businesses. www.mercantilemergersacquisitions.com