If your company has annual revenue of $10 million or more and EBITDA of at least $1 million, you’re probably getting inbound phone calls from Private Equity Firms (PE) and Search Firms asking if your company is for sale.
What will drive PE to pursue a transaction with you? Here are five PE firms’ responses to this question:
“The #1 thing we consider when evaluating a potential investment is ‘How can we grow it?’. This encompasses many things — industry and trends, size of market, existence of qualified add-on candidates, etc., but most important in our assessment of our growth possibilities is the quality of the human capital. Backing solid and successful entrepreneurs and management teams who are hungry for growth and are partnering with us to achieve more than they can on their own is of utmost importance in investing.”
“Our first consideration is always the people involved. We want to understand their situation, motivations, and philosophies, and how those things have impacted company culture. This helps us to evaluate if the deal is viable and how we can create the optimal transition plan.”
“In some respects, all investing requires a degree of gut instinct, but it’s really important here to distinguish between PE firms. We’re often doing recapitalizations of more mature businesses with a reasonable history of financial performance. In addition, most of our capital ends up flowing out to the existing owners in the form of liquidity; therefore, we must be financially disciplined in how we underwrite an investment. In doing so, we certainly evaluate the financial health of the business, but we also assess the macro-market, the customer stability, the quality of management team, and a host of other key data points. That said, at the end of that day there’s no such thing in private investing as 100% certainty, so there’s also a healthy dose of gut feel.”
“The #1 consideration when evaluating a business is the integrity and capability of the management team. You can never do a good deal with a bad person.”
“Sustainability is concern #1. Technology, customers, management, competitive advantages, industry nuances, cash flow… how sustainable are all these things in this ever-changing world? The more sustainable they are, the better my gut feels about the deal. I tend to look at what’s probable (versus what’s possible) and that starts with sustainability.”