Private equity has been an instrumental asset class over the last 30+ years, resulting in remarkable wealth creation for business owners and job creation at the companies they founded. There are of the asset class, to be sure, who point to cases of excess leverage or hubris leading to bad corporate decision-making. We are sure this occurs, but we also believe that often times private equity buyers provide essential liquidity to business owners where none would exist otherwise.
Consider the alternatives that exist for an aging business owner who wants to transition to retirement and monetize his/her investment:
A) give the business to his/her children,
B) sell to the business to a competitor (a/k/a a strategic buyer), or
C) sell to a financial buyer (a/k/a private equity firm).
The desire to leave a legacy behind for one's child is often a strong one. However, sometimes the parent wants liquidity as well to enjoy the finer things in life rather than giving 100% to their children. Even if the children are involved with running the business, a private equity transaction can help the parent take "chips off the table" and ensure multi-generational wealth for all parties involved, while still allowing the next generation to participate in operations and equity upside.
Selling to a strategic buyer might result in a high valuation, but often times results in significant disruption between the two operating companies that come together. Sometimes a competitor in one's industry doesn't have the financial wherewithal to make a sizable acquisition, or the two parties dislike each other to where they would rather keep competing rather than join forces. Therefore this option cannot be relied upon as the path to liquidity.
The decision to transact with a private equity firm option times gives the business owner a combination of liquidity, the option of an orderly transition and preservation of legacy, and opportunity to continue earning in the future (if the founder rolls equity into new company). They can control how much of the company to sell, and decide who the next party will be, There are value-add private equity partners like Minnehaha Equity in which the founder to achieve full or partial liquidity, the company can continue to grow and create jobs, and all investors can keep earning an attractive investment return. That is when you see the private equity business model at its best.
At Minnehaha Equity, we have worked with lower middle market companies for 20+ years as an investor, advisor, and operator across multiple industries such as semiconductors, pest control, home fragrance, artificial turf, retail signs, sporting goods, among many others. We look for companies that are poised for dramatic earnings growth by leveraging our experience with online marketing and AI tools and consultants.