Snapshot: firms need to offer expertise not just cash

In this competitive deal making environment, the best offer isn’t always the highest price, CohnReznick’s national director of PE and VC industry practice Jeremy Swan tells Private Equity International.

Given the high level of competition in the market for deals, managers need to respond to sellers’ wider concerns and offer more than a high price, CohnReznick’s national director of PE and VC industry practice Jeremy Swan tells Private Equity International. “The best offer isn’t always the highest price,” he said.

According to a CohnReznick survey of more than 50 investors and middle-market executives taken at the accounting and professional services firm’s fifth annual Liquidity and Capital Raising National Forum in New York, 28 percent of respondents asked to pick their key concern said negotiating a favourable transaction is the biggest concern when selling a controlling interest in their business. Twenty-four percent picked selecting the right buyer with the right fit as their number one issue.

About a quarter of the respondents said they would go to a private equity firm to raise capital for their business, compared with 21 percent who chose a commercial bank, and only 2 percent who picked public offering/IPO.

How can firms differentiate themselves as buyers in this market?

We deal a lot with owner-operated, family-owned businesses who come to the market and say, while price is important to them, they are concerned about what will happen to their employee base, about the locality, [their desire] to help drive the economy.

What does a “buyer of choice” look like?

Strategic buyers bring more to the table than just dollars. We see private equity firms building expertise; there are less and less generalist private equity firms focusing on pretty much any and all industries. 

Now not only are firms focused on specific industries, but also subsectors within them. The buyer would be able to say, we know the key drivers, trends and how to help grow this business.

I look at it as private equity going back to its basics: that the industry can be good at going into a business that’s capital-constrained and doesn’t have resources, and help find the partner that can provide the capital, expertise, and improve operations.

What is driving sellers?

Companies, particularly now and specifically the middle market, have seen the baby boomer effect. They have lots of senior-level team members, owners and operators, who are in their 50s and 60s looking at the next stage of their life, and the next generation is not necessarily there to take over the reigns.

So you have a lot of companies in that stage looking to exit but they have concerns that are more than just about dollars. As you see coming into the market, there’s competition for each deal that’s forcing private equity firms to have expertise. The ones focused only on the financials are going to have a much tougher time in the market. You better have the operational ability and expertise to grow the business.