Saved by a PEG: How Private Equity Groups are Riding to Your Rescue

Royal Armory, London (photo by David Worrell, 2011)

If these seem like dark days for funding or selling your business, you need a white knight to save the day.  Today, that’s likely to be a Private Equity Group.  There are hundreds of Private Equity Groups in the USA that together control billions of dollars of business capital.  Much of it can be invested with relatively few strings attached, and these firms actually want to invest in small businesses now.

THE FAIRY TALE

Private Equity Groups riding in to fund a business sounds like a fairy tale at a time when banks have stopped lending.  But in fact, PEGs often finance companies that would be too risky for banks and too mundane for Venture Capitalists (VC).

Private Equity Groups make a living from buying and selling the stock of private companies (mundane or otherwise).  While they hold the stock, they focus on fast growth and cash flow.  This combination of risk-taking and operational expertise fills an important role in the business finance markets.

And with the growing number of smaller “boutique PEGs” there is almost no deal too big or too small for these investors. (TIP: Look for PEGs that specialize in your industry, or those that might be consolidating multiple companies like yours into one larger business.)

THE DARK SIDE

If all this sounds a little too easy, don’t forget that every investor wants to make money.  In the case of PEGs, they like to make money when they buy into a company, not when they sell it.  Primarily, this means that they are looking to pay bottom dollar — or something close.

So if you are a small business owner looking for an exit, PEGs are reliable buyers but not the highest price buyers.  Since they are finance professionals, they are carefully calculating how much they can pay based on your past revenue and current cash flow.  They approach each deal with a very sharp pencil and must be convinced that your company can provide exceptional returns.

If your objective is to get the top dollar for your company, forget it. Look instead for a “strategic” buyer who will pay a higher price based on synergy and emotion.  PEGs are classified as “financial buyers” meaning they are looking only at the numbers.

A HYBRID APPROACH

Recognizing that not all business owners want to sell their stock for the bottom dollar, many PEGs offer an interesting alternative.  A business owner can sell a part of the business to the PEG, but stay on as CEO to manage the growth.  This is closer to the VC investing model and aligns the CEO and the investors in a push for rapid and sustainable growth.

This accomplishes several things:

  1. The owner gets to take some cash out of the business.  By selling a piece of the company to the PEG, the owner can lock in his own personal wealth and reduce the financial stress of owning a business.
  2. The company also gets extra cash.  PEGs will be sure the company has the growth capital it needs to execute growth plans.
  3. The PEGs management team can get involved, but leave the day-to-day operations to the veteran.  By not upsetting delicate office culture and staffing, the business is often better able to grow rapidly.

Here’s the best part. Over the next few years, as the business executes its growth plan and the value of the company increases, the owner’s remaining share becomes worth more (as does the PEGs share, of course).  That’s when the PEG can come back and buy the rest of the business from the owner, enriching him even further.  Since the owner get’s two paydays, and the combination is often richer than one single transaction, this approach is often called taking two bites of the apple.

FLEXIBILITY

The hybrid approach is a common deal structure, but it’s almost impossible to find an “average” PEG investment. Each Private Equity Group makes up their own rules, their own investment objectives and their own style.  For every billion-dollar fund that does only pre-IPO deals, there is a ten million dollar fund that will help distressed businesses get through a rough patch.  And everything in between.

Like every investor, a PEG wants to know how you are going to use their money to drive new profits.  But unlike so many other investors, the right PEG will be there by your side…Like a knight in shining armor.

Dedicated to your (Fairy Tale) Profits,

David

 

1 Comment
  1. Your blog is so so helpful…thank you!!!!

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