The deal market over the past year could best be described as sluggish. Jim Lisy’s post from August 2013 on the state of M&A deal flow mentions that for many potential sellers, the timing just doesn’t “feel right” based on the lack of compelling offers from buyers or a lack of compelling reasons to sell their business right now. However, there is another trend in the marketplace that may accelerate deal flow in the lower middle market during 2014: the growing presence of investment companies with a long-term perspective.
“Buy-and-hold” companies are creating another option for private, closely held businesses looking to sell and can be a great fit for several reasons. Below are just a few.
More time to realize benefits from business strategy. Traditional private equity firms might only hold a company for five to seven years, meaning that for a target company to be attractive, the buyer must expect a quick turnaround on any strategic actions. For instance, any add-on investments or capital improvements must be expected to take hold within the investment horizon to produce a return for the investors. On the other hand, long-term buyers generally aim to acquire a few, select businesses and grow them over the course of 10, 15 or even 20 years. As a result of this buy-and-hold strategy, these firms are willing to invest in companies and projects that may take longer than five years to realize a return.
More tolerance for transitioning ownership. Investment companies with a long-term approach generally have a higher tolerance for complex personnel issues since they have more time to handle the situation. Examples include owners who want to remain involved in the business, maintain customer and employee relationships, and continue their company culture.
Willingness to invest in smaller companies. Each holding company has their own separate investment criteria for target companies, including size, industry and location. Buy-and-hold firms are often willing to look at smaller target companies, generally between $500,000 and $10 million in EBITDA. Their threshold is generally lower than traditional private equity firms because buy-and-hold firms are frequently investing family capital or a small collection of high-net-worth investor capital, as opposed to institutional money, giving them greater freedom and less urgency to push towards a liquidity event.
Many provide regional focus. As an added bonus, many buy-and-hold investment companies maintain a regional focus, such as the Midwest, meaning that the new ownership will be local with an appreciation for the area and its people.
This long-term perspective can create a natural partnership between holding companies and closely held businesses. A longer investment horizon provides these types of buyers with adequate time to handle the particulars of their investee companies and grow them. Frequently, business owners are hoping to identify a logical transition plan that “feels right,” so it is exciting for those of us in the transactional world to see more of these types of investor options becoming available.
The traditional private equity model is still an attractive avenue for many sellers but the increasing number of these longer-term financial sponsors provides additional options for potential sellers when they are ready for a transition plan or equity recapitalization/infusion.
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