CAN SMALL BUSINESS OWNERS LEARN ANYTHING FROM PRIVATE EQUITY FIRMS???!
I say they can! While there may be a growing demand for service based businesses by private equity firms, the targets for PE acquisition seem to start around $10M in revenue.
That leaves about 88% of businesses to be bought/sold….(see https://www.naics.com/
So what can a small business learn from how PE firms look at businesses above $10M? A lot!
This weekend’s (Jan 16th) IBJ article titled “Service firms receiving multiple buyout offers from private equity investors” (https://www.ibj.com/articles/
1) Have a strong owner!
2) Have a strong management team! “You need not only a strong owner,” he said, “but a strong team below that.”
3) Consider the mix of the type of business/customer you have and ensure it doesn’t create weaknesses in future sale/margins. For service based business, consider service contracts and longer term contracts for maintenance and repair – which creates steady/predictable cash flow.
4) Consider and diversify the customer markets you service – having one single customer market (say commercial real estate) is a risk to a future buyer. Consider government, health care, education, B2B, B2C, etc.
5) Consider buying other small businesses to move yourself into those higher revenue ranges and potentially making yourself more attractive to more buyers.
These are all things that I work with clients on each and every day. Strong owner. Strong leadership team to delegate to. Customer mix. Market mix. Growth strategy.
So while not every business will be sold to a PE firm, there are some pretty basic principles to consider as a smaller business owner to move yourself into a better position when beginning the process of transition or sale. Preparing for sale is not a short-term endeavor. It takes advanced planning, considerable effort, and a team of people to help you get there.
IBJ Article Link: