It used to be that burnout was one of the top reasons that businesses valued at $5-50 million went to market. Now, for the first time in nearly three years, burnout has been replaced by recapitalization. This is according to the quarterly Market Pulse Report published by the International Business Brokers Association (IBBA), M&A Source, and the Pepperdine Private Capital Markets Project.

While retirement, burnout, and family issues continue to be some of the top drivers for sales under the $5 million mark, Scott Bushkie, Certified Business Intermediary, President of Cornerstone Business Services, Inc. and IBBA Chair, suggests that “the uptick in recapitalization activity could be an indicator that Lower Middle Market business owners are becoming savvier about their exit planning options and planning more in advance.” The Market Pulse Report found a substantial increase in private equity activity in the $5 million to $50 million category in Q3 2016 (50% of buyers) compared to Q2 2016 (39% of buyers).

What is Recapitalization?

Recapitalization occurs when a business owner sells a piece of his or her company – either a minority interest (less than 50%) or a majority interest – to a private equity investor or firm. These financial buyers typically invest in companies with an existing management team in place, employees, and an overhead structure in order to run the business.

The buyer may even want the seller to stay on for a period of time to run and continue to grow the business with less risk. It’s beneficial for the seller because s/he no longer has all of his/her eggs in one basket. And by maintaining some ownership in the business, the owner may be able to get the proverbial “second bite of the apple” if the business is sold again in the future.

“More business owners are finding that recapitalization minimizes the risks and stresses of operating a business,” says Craig Everett, PhD, assistant professor of finance and director of the Pepperdine Private Capital Markets Project. “Sharing financial responsibility with a private equity firm is a smart move for business owners who need strategic support or a cash infusion. When owners become ready to sell and retire, recapitalization can make their companies more attractive to buyers.”

What Do Investors Care Most About?

Similar to what we discussed in Would a Private Equity Firm Be Interested in YOUR Business? the survey reports five key weaknesses buyers are most concerned about:

  • Declining profits
  • Declining sales
  • Poor financial reporting
  • Lack of management team
  • Customer concentration

Owners need to identify their weaknesses and fix them during the business transition planning process in order to enhance their attractiveness to investors.

What Can Owners Do to Increase Their Attractiveness?

Knowing that private equity investors are looking for future return on investment and growth potential, owners should remember to focus on the future rather than dwell on past performance. Documenting improvements that can be made with new capital helps you to position the company better and can increase value substantially. Growth opportunities, reputation and industry leadership are some of the many qualities investors appreciate.

If you are thinking about selling your business and realize you need to grow the value, you may want to consider a private equity recapitalization. We encourage you to seek independent and objective advice before making any decisions. There are many possibilities for ownership transition that will enable you to achieve your goals. You want to be sure you consider all of them before taking this big step.

About the Survey

The Q3 2016 survey was completed by 278 business brokers and M&A advisors, representing 38 states. Half of the respondents (51%) had at least 10 years of experience in the industry. Respondents completed 246 transactions this quarter. The Market Pulse Report compares conditions for businesses being sold on Main Street (values of $0-$2MM) to those being sold in the Lower Middle Market (values of $2-$50MM). The Q3 2016 survey was completed between October 3rd and October 18th.


Ready to Become a Member?

Apply for one of our memberships today to gain access to all the resources you need to secure your deal of a lifetime!

Apply Now