Gold is near record highs, oil continues to drive the nation, and rare earth minerals are restructuring geopolitics and headline grabs.
But today's truly hot products are unknown American middle market companies, particularly businesses known as the “Upper Middle Market.” chief executive officer Magazines are most commonly performed. The gold rush won't be too late anytime soon.
Between 2019 and 2024, average EBITDA multiples between $10 million and $250 million in all industries, geography, and revenue quality (all industries, regions, and revenue quality) from about 6.6 to 7.1 times by mid-year last year, despite the rotation of wild markets driven by communities and inflation.
That's how you can thank the private equity industry. PE, as you know, gobbling these businesses with little concern about whether to make networks (Barracuda network) or noodles (PF Chang's).
Midmarket CEOs who have ever sent emails are regularly fired by ambitious private equity principals, and will be able to pry your business (in the pocket) without competition, wine, meals and faw you. Without your business, they won't be able to deploy capital, earn fees, or earn flip shares. We have already seen a decline in returns for many companies, and fundraising is a proposal to win, with the largest companies getting the majority of new investments.
It speaks to the basic and indisputable issues private equity faces. A commonly used PE tool is to look at the overall addressable market (TAM) of a potential target company. With our proprietary TAM tools, we can quickly see that PE has structural issues that limit growth potential.
There are an estimated 18,000 private equity companies in the US, an increase of almost 60% over the past five years. These companies have raised an estimated $1.6 trillion in funding, but have not yet been used (“dried powder”).
At the same time, there are only about 49,000 mid-market companies, according to the official US federal business census. Private equity already owns about half of the available pool. Much of the rest is not for sale (and may never be for sale).
Some may think that private equity relief comes from purchasing even larger companies. But mathematics is even worse. With only 3,354 of these companies in the US, many of these companies are publicly available, making PE ownership extremely difficult (and expensive). That's why private equity continues to look for companies in the lower middle market.
So whether an exit to private equity may or may not be in your future, you will pay to make your organization the best possible form. Some essentials include:
- Develop your story. Work to build a solid, engaging and clear narrative for a business that is engaging to potential buyers. Practice until it's second nature as it needs to be adjusted according to your potential audience.
- Know your company's market. Take your time and meet with your investment bank regularly to understand who is in the market for you and what they value most. This helps develop a more focused value creation strategy with a higher exit multiple, rather than growing business equally in all areas.
- Think of it like a buyer: Be prepared to show potential investors your profits after sales by showing potential investors a multi-year strategy to increase the value of your company. Operational improvements, additional M&A goals, digital transformation, etc.
- Focus on key talent retention: A strong management team will add great value and appeal to potential acquirers, implement strategies to attract and retain the best talent.
- Prepare the data. The time you have your financial house and your data house in order is long before you begin meeting with potential buyers. It is essential to have a detailed understanding of what buyers want and make it easy to access. Consider hiring consulting CFOs focused on M&A projects to avoid disrupting your business.
Time to take on this task is long before you have to. And next time you read about hot commodities and other trending investment ideas, remember that you have the hottest assets of all.
