Over the past 20 years, our firm has built a database of Private Equity Group buyers. Virtually every day, we are in contact with these firms, and we know the reasons they will pay top dollar for your business.
1. Management in place or well-trained employees
Most Private Equity Groups (PEG’s) are not searching for a single business to own and operate. Instead, they are searching for companies that they can grow and eventually sell. Their most prized target acquisitions are either run by management (not the owner) or at least one that has a good “bench” of employees capable of stepping up to run the company. Obviously, smaller businesses cannot afford to employ full time non-owner management, but at a minimum, and to make your business attractive to PEG’s, make sure your employees can run the day-to-day operations.
2. Systems and Technology
Since PEG’s seek to grow the business, it’s essential to have robust operational systems in place supported by current technologies. Depending upon the type of business, this could mean field operations personnel with tablets, sophisticated CRM’s, cloud computing, and certainly a versatile financial reporting system. Well-documented systems and operating procedures allow for a quicker and easier transition to new ownership and provides a strong base upon which the PEG can grow the business.
3. Solid CPA prepared financials
Private Equity Groups are typically very sophisticated in their financial review of the target business. They don’t like surprises, and they do not like trying to figure out if the income and expenses were booked correctly. While most small businesses do not have audited financial statements, it does help to have your financials prepared by your CPA. The same goes for your tax return. And if there is a difference between your income statements and your tax returns, be prepared to have your CPA provide a reconciliation that can tie the two together.
4. Recurring or subscription-based revenues
Private Equity Groups love recurring revenues and in particular, subscription-based businesses. Consider Microsoft, and their move from selling Microsoft Office programs as the customers chooses to upgrade to a guaranteed income stream with their subscription-based Office 365 Suite paid monthly. Not every business model allows for recurring revenues or subscriptions, but many industries are moving towards this model. Even home service companies like HVAC contractors have initiated service contracts and membership programs promising discounts or expedited service. Subscriptions increase the likelihood that your customer will come back to you, and for the Private Equity Group, it reduces the risk of the transition.
5. Diverse customer base and multiple vendor sources
Private Equity Groups are risk-averse. They fear the loss of key customers or the sudden loss of a supplier. To the extent that you can, try not to have any single customer represent a large portion of your revenues. The same applies to your suppliers. You may have purchased goods or services from the same vendor for years. That’s great! But always have backup vendors to ease the fear of having all your eggs in one basket.