Last month my team member, Scott Densmore, and I attended an industry conference in New Orleans. I have been attending similar conferences twice a year for over twenty years, not only to stay current with changes in the industry, but primarily to interface with the forty-plus Private Equity Groups (“PEGs”) that usually attend these conferences.
Over the years, I have sold numerous client companies to these PEGs for tens of millions of dollars, so these conferences rank high on my list of best uses of my time. In addition to completing transactions and getting leads on potential acquirers of client companies, I use this time to try to get a handle on trends that the PEGs are seeing in looking at transactions across the country and among different industries. Below are some of the key takeaways from last month’s conference:
Capital Availability
It is estimated that there are over a trillion dollars of investment capital looking to be deployed by buying privately held businesses. Frankly, the PEGs are having difficulty in finding appropriate businesses to buy, and as a result, they are becoming more open to the types, sizes, and locations of businesses that they will consider as a buyout target.
Industries of Interest
Buyers, including PEGs, like predictable income streams. Three magic words: Monthly Recurring Revenue, are music to my ears because I know that PEGs and lenders will look closely at that type of investment. Two industries, in particular, seemed to be at or near the top of many wish lists: food and dental practices.
- Food because it is a consumable and the strong economy provides for additional discretionary spending on more exotic and expensive offerings.
- Dentistry because it not only ties to recurring revenue, and aging demographics, but sophisticated practice management techniques can increase revenue and decrease costs.
Bottom line… if you have a business in either of these two industries and are thinking of selling within the next three years, now is probably a good time to explore your options. I would also add that if you have any type of business and are thinking of selling within the next three years, now is a good time to explore your options.
Geography
When I am talking to a representative of a PEG, and that representative finds out that our firm is headquartered in Colorado, the usual response is something along the lines of:
“What a great place to live! You have one of the best economies in the country. We would like to find an appropriate company to acquire in Colorado to add to our portfolio.”
The point below discusses the concentration of PEG-owned businesses in Colorado for these reasons. Additionally, we find that because of the availability of direct flights in and out of Colorado, it is a fairly easy travel destination and PEGs from Chicago and Dallas have a disproportionate interest in Colorado businesses, due to ease of access.
Private Equity is Hot in Colorado
When looking at the states with the highest number of Private Equity (PE) portfolio companies, it is no surprise that California, Texas, and New York top the chart. With an economy that is bigger than most countries, California is the clear winner due to its sheer size. However, when you look at the number of PE-owned companies in each state per dollar of Gross Domestic Product (GDP), the numbers paint a different picture. Normalization by GDP drops California to number ten and brings Colorado, Utah, and Massachusetts into the top three.
Colorado definitely has a strong PE presence, with over 40 PE firms having offices located in the state. One of the largest firms, Resource Capital Group, has over 60 portfolio companies and a fund size of over $2 Billion. Although the sunny skies and beautiful mountains may have something to do with the desire to do business here, it could also be the booming economy. US News & World Report recently ranked Colorado as having the #1 economy in the nation.
Popular industries for portfolio companies in Colorado are:
- Manufacturing
- Business Service
- Industrial
- Technology
Ranging from Aerospace and Defense to Tires and Rubber, Manufacturing companies seem to have the highest demand followed by Business Services, such as Advertising and Security and Alarm Services. While PE acquisitions are usually thought of as requiring $1 million or more in EBITDA, PE firms have been known to be interested in businesses with a cash flow of $250,000.
References:
http://blog.privateequityinfo.com/index.php/2018/04/26/favorite-states-for-private-equity-investment/
www.privateequityinfo.com
https://www.usnews.com/news/best-states/rankings
For more information about how to sell your business to a Private Equity firm, contact The FBB Group. We would be happy to use our experience and industry relationships to help you maximize the value of your business in the marketplace.
The majority of our business is derived from referrals. Please consider referring our services if you encounter a situation involving the potential purchase or sale of a business.
Ronald V. Chernak
President
Inspiring business relationships since 1982!
(originally posted in the June 2018 newsletter)