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Your company might be ready to consider a private equity investment sooner than you think. "There is already a frantic bidding frenzy for the $5 to $15 million deals," says Eric Siegel, a lecturer in entrepreneurial management at Wharton School and founder of advisory firm Siegel Management. "Now you're finding much more activity for the $2.5 million deals, too." That's likely to continue, as these deals don't usually rely on the recently roiled public debt markets. David Lobel, a partner with Sentinel Capital Partners, says his fund considered 56 small business prospects at a recent weekly meeting. "It's an enormous number of deals for us," he says. "A year ago we would have had 30."
One reason: The vast amount of capital still available to private equity firms is forcing them to look at smaller deals, or, as Siegel puts it, "for fishing ponds where there aren't as many fishing lines." And with private equity titans such as Cerberus Capital and Blackstone Group constantly in the news, entrepreneurs increasingly view private equity as an option, even though those giant funds aren't the ones chasing small firms. "There's no one even half awake who isn't aware that there's an extremely competitive market for investing at all levels," says Colin Blaydon, director of the Tuck Center for Private Equity & Entrepreneurship at Dartmouth. "Small businesses are responding by hiring professional advisers and engaging in incredibly sophisticated deals."
In the past, he says, private equity funds simply bought minority stakes in small businesses. Now, entrepreneurs' deals often look like classic big-business transactions, with multiple investors, aggressive recapitalizations, and performance incentives for top management. In some cases, the entrepreneur holds on to a substantial stake in order to cash out eventually alongside the private equity firm. Others make outside investments conditional on the acceptance of employment agreements for key staff or use the deals to give employees stock in the company.
"My partner and I wanted to take some chips off the table and make sure our families were taken care of, but we were also very specific about wanting to run the company," says Stuart Piltch, 47, co-founder of the $20 million Cambridge Advisory Group, an actuarial and benefits consulting firm in King of Prussia, Pa. After considering multiple bids, he and his partner, Barry Cohen, 54, closed on a deal with Harbert Management and Marion Investment Partners in December, 2006. Cohen and Piltch now own 72% of the 50-person company.
The financial payoff can be huge. Because outside investors are preparing for their own exit, an entrepreneur who retains a stake in the company gets a second payday if and when the business is sold again. Michael Erinakes, president and CEO of commercial divers U.S. Underwater Services in Burleson, Tex., just got his second windfall. In June, 2006, he sold 60% of his company to Benford Capital Partners. He invested the $9.5 million in new equipment, while Benford streamlined the company's operations. This summer, Erinakes, 40, cashed out completely when Neptune Marine Services, a large Australian company, acquired U.S. Underwater Services for $21 million. Erinakes, now president and CEO of the Neptune subsidiary, says letting go of his ownership stake wasn't easy, "but it was incredibly profitable." Which is exactly what private equity is supposed to be about, right? By Amy S. Choi