If You Want Your Dreams to Come True, You Have to be Vulnerable

The deal boom has begun, so don’t miss out.

I travel every week and talk with attorneys, investment bankers, and private equity firms. They are all saying that the deal boom has begun.

The middle market business segment, with more than 100 employees, is shrinking. In the past decade, with fewer of these companies available to buy, private equity firms have had to fight over them. The majority of deals in this space are add-on acquisitions, where larger private equity platform portfolio companies are typically adding on smaller businesses that bring additional customers and adjacent products to sell to their existing customers

High net worth investors (family offices) have also aggressively joined the private equity space, exacerbating the reality of too much money chasing too few deals—the new normal.

The result is a growing pool of capital in a shrinking corporate market. The capital has nowhere to go but down market to businesses with fewer than 100 employees (lower-middle market businesses).

This is why you are getting cold calls to encourage and solicit the sale of your business.

The rise in founder-friendly deals

For private equity firms to be successful investing in the lower-middle market, they have to offer founder-friendly options. For most founders, deals are not just about the money. They are seeking to protect their legacy, company culture, select team members, and sometimes even their company name. Many times, founders also want to continue to operate the business and maintain a majority ownership. More and more deals are getting done now with these founder-friendly features.

One of the biggest attributes of a founder-friendly deal is the length of time a private equity firm wants to maintain its ownership stake in a business. Traditionally, the hold period is 5 years or less, given that most of these private equity funds were raised from investors with a 10-year fund life. High net worth and institutional investors, which are the most common source of capital for PE funds, focus on return on investment, but also when they will get their money back (liquidity).

These same investors now know that to deploy their investable capital, they must loosen up their liquidity parameters. This is resulting in the creation of PE funds with 20, 30, or even permanent lives (evergreen funds).

Founders can now construct deals that are much more friendly.

Attract and invite everyone to the party

We want everyone to come to the party, so we can choose to date as many as possible before we lock in on one potential buyer. With investors all clamoring for great investments in the lower-middle market, founders should seek to prepare their business for sale. After all, a great business to sell is also a great business to keep. So, why not be ready? When the time comes, you will be glad you did the hard work to professionalize your management team and their operating system, de-risk the business (reduce customer concentration, expand product and services offered) and improve the quality of earnings (predictable revenues, enhanced gross margins, and technology-enabled back office).

Preparing your business for a potential sale will allow you to attract and invite everyone to the party. By making your business capital market ready, you will see interest from private equity firms, family offices, and strategic buyers.

Be vulnerable and share your dreams

All successful relationships are built on a foundation of alignment and trust. This is no different when you are considering a capital partner (investor) for your business. Most business owners try to hide their fears and dreams. Potential investors are measuring risk against the return they expect to receive. Unless you are willing to share your fears and dreams, you will never truly align with your capital partner. Misalignment is the top reason for discord and disappointment in this scenario. If you walk into a journey together with a capital partner that is helping you mitigate risks (fears) and maximize value (dreams), your second bite of the apple will likely taste way better than your first.