7 Factors that Make Your Business Desirable to Private Equity Firms and Financial Buyers
Financial buyers (aka private equity firms and guys that look like them) have billions of dollars to purchase companies, making a sale to a financial buyer one of the top ways for mid-size business owners to get liquidity in their business (liquidity is a fancy way of saying cashing out / getting the benjamins / I’m rich, bitch!). Please note that every industry is different, so this will be most applicable for companies in consumer, industrial and services businesses. Media and technology companies sometimes have their own rules (especially on the profitability side- the other stuff is fairly standard across the board…).
Even if you are a smaller business, these guidelines can help you think strategically about what creates long-term value for a business. Use these as goals and guidelines as you grow your business.
#1- Be On Top…
Who doesn’t like to be on top (minds out of the gutter, please)? Market leadership is a key desirability factor. Buyers want to buy the leader in a category or a niche. Maybe they’ll go for #2, but buyers don’t want to buy they guy who gets picked second to last for kickball on the playground, if you know what I mean.
#2-…But With Upside Potential
While buyers want you to be a category leader, they also want to know there is a reasonable plan for future growth. If you are on the peak of the mountain, the only place you can go is down. Make sure you have a credible growth plan to maintain desirability.
#3-Cash Flow
Financial buyers flock to profitable companies and usually target companies with a minimum EBITDA (earnings before interest, taxes, depreciation and amortization) of at least $2 million. There are a handful of firms that will dip down to $1 million, but very few that want less than that (again, unless you are in the media or tech industries…).
#4-Low Customer Concentration
If you are too dependent upon any one customer (or small group of customers), that spells RISK! For many private equity firms, the range of customer concentration which makes them “go limp” on a deal will be between 10-25%, depending on the industry and your overall customer list. You want to keep your customer concentration as low as possible, within reason (i.e. you still need to be able to manage all of your customers and you obviously don’t want to dump your best customers, either).
#5-Have a Diversified Product/Service Offering…
Just like customer concentration spells risk, so does having all of your eggs in one basket on a product that may fall out of favor. Again, this varies by industry, but if you sell 110 products and 98% of sales come from just one SKU, that can raise some red flags. Obviously, this is more of a concern with certain industries.
#6-…But Not an Unfocused Offering
While diversification is good, the products and services that you offer should be related so that the financial buyer can identify likely competitors that may be willing to buy the company when they exit in the future. This means that the products should all go through similar distribution channels, be sold to similar customers, or be the same type of product at different price/value levels. If you sell popsicles, whips and garden shears, that is going to be a problem (and is definitely not desirable).
#7-You
Financial buyers want to invest in a business, but don’t want to run it. They want competent management that can execute on the growth plan. So, don’t think you will be able to head off to the beaches and sip margaritas after your sale to a financial buyer. Incentivized management that wants to stay in the business for at least a few years is highly desirable, so factor that into your succession plan.
While every industry, company and “deal” is different, hopefully these desirability factors can serve as some good guidelines for how to plan the strategy for your business.