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Buyers of private companies are normally strategic acquirers or private equity investors. Historically, strategic buyers have paid a premium for acquisition, because they can use their existing business to cut costs or drive additional revenue. When debt capital was cheap from 2006 to 2008, however, private equity buyers were able to pay as much, or more, than the strategic buyers.
With the collapse of the debt markets in 2009, merger and acquisition volume fell almost 63 percent. Private equity transaction volume, as a percentage of closed deals, also fell precipitously, declining from 31 percent to 24 percent. Given the continuing fragility of the lending environment, many people have come to believe private equity is no longer a viable pursuit. Reality shows a different conclusion. The market may have contracted, but private equity deal volume grew over each of the past three quarters. Companies considering a liquidity event should look into private equity and follow these tips when exploring options:
1. Make sure your company possesses the right characteristics. Not only should your small business be growing, but it should also have $5 million or more of annual cash flow, a solid management team that will remain with the business, low amounts of leverage, and opportunities to grow through acquisition.
2. Know that engaging in a dialogue with financial buyers is a time-consuming effort. Be sure you have the necessary staffing to support the business during the process. A drop-off in performance during a dialogue is likely to diminish interest.
3. Don’t look at private equity in isolation; consider both strategic buyers and financial buyers in parallel.
Private equity buyouts may not be everything to everybody in today’s markets, but they remain a real liquidity alternative for some. With more than $400 billion in capital on the sidelines, deal activity should continue to accelerate. In short, private equity is not dead.
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