While there is a growing opportunity for private equity investment presented by companies owned and managed by aging baby boomers with no heirs to hand the business over to, many founders still resist private equity buyers for fear of change and job losses, CohnReznick’s national director of PE and VC Jeremy Swan tells Private Equity International.
Why do PE firms face challenges buying family businesses?
A lot of these family-owned businesses’ perception of private equity is what they read in the press or hear from friends. I had clients who were looking to sell their business but specifically said they don’t want to sell to private equity buyers.
It is an incorrect perception of the market.
A lot of these businesses are connected to the local community and had employees who have been there for 15, 20, 30 years. I had one CEO of a business who said, “I want a good price for my business but really want to make sure the employees keep their jobs after the deal is done.”
Their perception is that a private equity firm comes in, strips it out, fires everybody and changes the business, versus a strategic buyer who’s going to appreciate the business and keep things status quo.
In my experience, it tends to be the opposite. If the business is doing well and doing what it needs to do, private equity firms aren’t going to fix something that’s not broken. Private equity could be a good option for them as they provide the foundation for the business to grow. They could be a base for private equity firms’ investment theses, looking at add-on acquisitions to expand geographically or the product lines.
How can PE investors overcome these challenges?
The first step for private equity firms to take is building that trust with the management team and getting to know the family dynamics. Even if there’s no transaction, it’s about really starting to build that level of trust, interaction and relationship. The firms that have been very good at getting out and building relationships with companies and management teams well in advance of the transaction have a much easier time getting to the point where there is a transaction.
Why is there an opportunity with family-owned businesses?
You have businesses that are stable for the most part, and probably growth-strained because of the lack of investment in the business. It likely hasn’t expanded in product lines or geographies as much as it could have, because the owners weren’t focused on getting a double-digit return on investment in five years [like private equity firms do].
So private equity managers have potentially great acquisition targets where they can add expertise. We’re starting to see a nice amount of flows of those businesses as the baby boomers look into the next stage of their lives.