Mid-Market Companies are More Willing to Sell Themselves to Private Equity Buyers

According to a survey of 500 mid-market executives by Harris Williams & Co., 18% of respondents said a private equity firm was their preferred acquirer. That’s up from 13% the previous year and represents a 38% increase. Meanwhile, respondents who said corporate buyers were their top choice fell from 49% to 46%.

John Neuner, managing director at Harris Williams, told Bloomberg.com that buyout firms are developing industry expertise and, some are now bidding at prices as high as corporate buyers. These firms also have the capital and an interest in deals with strong profit potential.

“A lot of these owners and entrepreneurs view private equity and say, ‘If you can help me make a better decision quicker, I’m better off for it’,” says Neuner. “It’s a great time for sellers to come to market, or at least [to] start thinking about it.”

According to Bain & Co., businesses worth $25 million to $250 million were bought last year at a median six times earnings before interest, taxes, depreciation and amortization. That compares to 11 times cash flow for large companies valued at over $250 million. More than 90% of business leaders said they were interested in mergers and acquisitions in the next three years.

Private equity firms are interested in mid-market companies because they offer more value and have higher growth rates. Bela Szigethy, co-chief executive officer of the private equity firm Riverside Co., told Bloomberg that with more room for growth, these companies can more consistently find ways to increase sales. “The smaller end of the market and the middle market in general simply offers up more opportunities to make things better,” said Szigethy.

Mark Goldfarb, Ohio Managing Partner at the advisory firm of BDO, told Smart Business that private equity buyers can offer an abundant supply of capital and sophisticated networks of internal and external buyers. He said private equity firms are also often interested in doing deals where the owners retain a stake.

“Because PE firms are specially focused on growing and improving the business they purchase, when they eventually exit, your stake may well be worth considerably more than on the date of the original deal,” said Goldfarb.

Many private equity firms are seeking companies that are candidates for M&As and will do a “substantial” amount of investigation. Those interested in hearing offers should consider the chemistry and work relationship along with the firm’s track record of past deals. Private equity firms can range from being knowledgeable, pleasant and easy to work with to difficult, demanding and controlling, Frank Placenti, U.S. chair of Squire Patton Boggs corporate finance and governance practice, told AzCentral.

“In the end, partnering with a private equity firm is much like a marriage. Styles and valued need to be compatible,” Placenti said.