Understanding Private Equity Buyers in Mergers and Acquisitions

hi this is Brett Sanctus I'm a business lawyer in an M&A broker and we're talking today about different types of M&A buyers specifically we're talking about financial buyers or generally private equity firms it's a special type of buyer they have their own motivation and they have their own sort of unique pros and cons from the standpoint of a seller private equity investors are firms that have a lot of money user is a lot of outside capital to come in and buy companies and to grow them and turn them around we call them financial buyers because they're just looking for a financial return they may have experience in the industry that may be buying a lot of companies in the industry but they're not really viewed as like didn't start a company they come in to me take over companies and they're looking for a return for their investors so these buyers are every buyer is different every seller is different that goes without saying but there's certain common things that are things that are common among these types of buyers these are be the others so let's start with financial buyers these are companies organizations that have big piles of cash you know some of them like Carlyle Group Blackstone KKR Kohlberg Kravis and Roberts these are huge private equity firms with you know no reason 5 billion dollar funds to go turn around companies we operate in the 1 million to 25 million dollar M&A market they're not operating they're you know they're buying billion dollar companies and half a billion are companies and they're just doing much much much bigger deals in this part of the world though private equity very active we see private equity groups buying million-dollar companies it depends those are users smaller funds they're usually rolling companies up you know meaning buying a whole bunch of companies to put them together and maybe if seller to take a public that they're unique issues compared to individuals and strategic buyers things that you can generally count on on the positive side if you're a seller are that they don't get cold feet right they this is what they do they buy companies so it's not that they won't walk away they're fairly fairly disciplined they've looked at a lot of companies oftentimes I've done a lot of companies in your space so their antenna might go up for things that are wrong they know there's other opportunities out there but generally they're not gonna walk away just because they're nervous about closing a deal or something just generally right whereas an individual will get to may do that to you private equity is there the business of closing deals they were on a close your deal there's no question also the process from signing a letter of intent or getting things going to closing the deal will be considerably smoother it's probably I mean the term I want to use but might be better say it's more structured meaning it's gonna be more you know they might put you through the wringer I'm gonna get to that in a minute but it's like it follows a clear course there's not usually a lot of like wavering there's not usually a lot of do we want to close this or it's it's usually just you kind of know what you're gonna get with private equity firm what you're gonna get then I'll get in this in the cons or what things that are not great about it is that you're gonna get a very fulsome process they're gonna conduct a lot of due diligence they're often these deals are heavily lawyer but you again kind of know what to expect and the follows of course they're fairly rational and it's just you know it's tends to be a you know a less emotional experience that doesn't mean that they don't get what we call deal heat and they want to close a deal they do but but it's just a more consistent closing process on the negative side if you're doing a private equity firm is that that tends to be a more rigid in more heavily lowered transaction they tend to do a lot of due diligence and my theory on this is that even if it's a million-dollar deal the private equity people come in like they're doing that like let's just say they do 20 million-dollar deals normally and they're buying your million-dollar business they're still gonna apply their same process and people to your million dollar business that's just what they do they appreciate the value of lawyers in the M&A space they appreciate the value of good professional advisors tax accounting help and they want them in there on those smaller deals and they don't care if the amount of money they spend is a little out of whack with the size of the deal they just don't that's a you're on a standard process they view it as a cost that they spread across all their deals so if your son a million dollar business you're dealing with private equity you can expect they're gonna ask a lot more questions and a lot longer to close I should have touched on the the pros the good things about private equity they usually have their money already lined up now sometimes they use a lot of leverage some private equity ops which means they go get loans but in the part of the market where we operate million to 25 million usually private equity just gonna pay cash and that's you know better than when we get to individuals who have to get financing that's a much much bigger risk so add that into the pros at least in the lower end the Main Street and lower middle market and 1 million to 25 is kind of our space you're gonna see private equity usually to paying cash that's good on the negative side we touched on it's a more fulsome process you might feel like it's a root canal there's lots of questions they were looking a lot of stuff to be happily lawyer things like that also on the negative side with private equity is they generally will want you as the seller and your team to stick around ok now that might be good you might want the job but often times you want to move on to greener pastures you don't really want to have to stick around and they'll often want you to because they need the management team there they may have some redundancies if they're they're rolling up companies that are buying a lot of companies in an industry there may be some overlap but generally speaking compared to strategic buyers private equity is going to want the people to stay around more and that can be very now can be lucrative there can be stableness is and they're much quicker to give out equity incentive plans and my experience than strategic so that's that's good but if you want to just say here is your the keys good luck that's gonna be less likely you can do that and still get your deal closed with a with a private equity buyer the last thing I'll touch on on negatives with the private equity buyer is that you know generally speaking generally speaking you can expect that their offer to you the purchase price is going to be less that's because they don't have synergies they're bringing to the table usually they might just be looking for to turn this business around so they're gonna be a little bit tighter on price yeah that's not always the case I've run into a lot of private equity firms that are buying companies up and rolling them up in an industry and they do look at it like their synergy and they really are trying to put these companies together they're looking to pay three or four times EBIT da and then put this all together and take it public or sell it for eight times to ten times or something so they're sort of viewing it as the whole is greater than the sum of its parts kind of thing and they're willing to pay aggressive they want to close deals and they don't want to be outbid so that really depends on what kind of private equity buyer you have again if they're rolling things up that's probably one that's just wants to pay and wants to do deals they don't want to lose a deal over price but if they're not in this industry normally they're being opportunistic and just finding a good way to make some money they're gonna be a little bit tighter probably on what they pay so thanks for joining me today talking about private equity buyers check out my next video where we're gonna talk about competitors or strategic buyers which is another type of buyer they're different than financial buyers they've got different motivations they've got different pros and cons so as a seller you understand them as well I think you're stopping my day [Music]