So. Much. Money.
It's tough to be a private equity group right now. PE Funds have the unusual problem of having raised a lot of cash. They have lots of cash, but very few deals in which to put it to work. Add to that those pesky corporations with record profits and soaring stock prices, making them competitors for good deals. Even the hedge funds are playing around in the private equity sand box for nice companies.
And then there's a timing issue. Many private equity groups are desperate to place cash before the corporations get a tax change, allowing them to pay even more for good target companies. Private equity is racing to find good deals and to put larger sums of money to work.
So what's a private equity group to do?
This unusual situation is making private equity do unusual things.
1) They will look at smaller deals
Just a couple of years ago, if you had a business that wasn't making at least $5 million in EBITDA, it was very difficult to find PE investors to look at your business. Now, every meeting we have, the bar gets lower and lower for investments. I have had meetings with very prestigious, household-name-type private equity groups that will now look at deals with less than $2 million of EBITDA. This was unheard of in 2015.
2) They will get creative
Only want to sell 30% of your business? They will look at that. Don't want to stay on to run the business? They will look at that. Don't have a CFO? They will find one.
In other words, they are willing to be extremely creative in deal structure and terms when they find a deal they like.
3) They will look at messy deals
Everyone likes the nice, shiny deals. Those always sell for great prices. However, nowadays we are seeing a tolerance for businesses with issues that previously would have made them unsalable, or certainly candidates for very low valuations. Issues like losing your biggest customer, a large customer concentration, or a necessary upgrade, may now be overlooked by private equity buyers.
4) They will venture into areas that previously gave them the heebie-jeebies
Because private equity groups have to sell their businesses after certain hold times, and tend to operate under investment charters that they have promised investors they will follow, they can be confined to looking at only certain types of transactions.
However, lately, there has been a willingness on the part of private equity to look at transactions in industries that were normally financial buyer wastelands. Areas like automotive exposure, wild cyclicality, commodity pricing risks, and even venture-feeling new technologies are no longer off limits for financial buyers.
What does this mean for the business owner?
If you have a nice, shiny business that you are thinking about selling, don't wait. The feeding frenzy for good businesses that can be generated right now in these market conditions is unprecedented.
If your business is a bit smaller or has some challenges, it still might be a good time for you to sell. There is a willingness for the market to forgive some business issues that normally drag on value. If you own a business but didn't think it would sell because of challenges or risks, now might be a good time to consult an investment banker. You may be very surprised at their answer.