Frequently, when a person looks to sell a business, the first person he or she asks for tips is an insurance or financial advisor.

The problem is, these professionals usually aren’t equipped to provide this kind of advice or service because they most simply don’t know enough about the state of the private equity market.

Unlike the rest of the financial sector, Private Equity Groups have not been hit hard by the credit crunch and resulting stock market declines. These entities generally manage money for insurance funds, pension funds, charitable trusts and sophisticated investment groups – they now number in the thousands in both the U.S. and Canada.

They’re also useful for advisory firms looking to recruit talent by growing through acquisition.

PEGs represent a major market shift for the acquisition of privately held companies. They have capital to invest and are actively looking for business acquisitions or investments. Despite the downturn in the Canadian economy, the buyout and investment market for Canadian companies remains hot. Even early stage businesses are being sought out.

In the past, the private equity market was traditionally restricted to acquiring or investing in larger companies. But increased competition for those operations, the greater growth potential of smaller firms, and an easier path to exiting the investment of smaller firms in the future have played a role in attracting PEGs to smaller companies.

Today, they’re key players in business acquisitions. They offer flexibility as a liquidity source, giving entrepreneurs the ability to take some cash off the table, recapitalize their company or simply sell and move on. Structurally, PEGs are typically organized as limited partnerships controlled and managed by the private equity firm that acts as the general partner (effectively buyout groups that seek to acquire or invest in ongoing, profitable businesses that demonstrate growth potential). The fund invests in privately held companies to generate above-market financial returns for investors.

The strategy and focus of these groups varies widely in terms of investment philosophies and transaction-structure preferences. Some opt for complete ownership, while others are happy with a majority or minority interest in acquired companies. Some limit themselves geographically, while others have a global strategy.

But they also have several things in common. They typically target companies with relatively stable product life cycles and a strategy to overcome foreign competition. They avoid leading-edge technology (this area is left to the venture capitalists) and have a preference for superior profit margins, a unique business model with a sustainable and defensible market niche and position.

Other traits that appeal to PEGs are strong growth opportunities, a compelling track record, low customer concentrations, and a deep management team. Most prefer a qualified management team that will continue to run the day-to-day operations while the group’s principals closely support them on the board of director level.

Private equity buyouts or investments take many forms, including:

Outright Sale – This is common when the owner wants to sell his ownership interest and retire. Either existing management will be elevated to run the company or new management brought in. A transition period may be required to train replacement management and provide for a smooth transition of key relationships.

Employee Buyout – PEGs can partner with key employees in the acquisition of a company in which they play a key role. These key employees receive a generous equity stake in the conservatively capitalized company, while retaining daily operating control.

Family Succession – This type of transaction often involves backing certain members of family management in acquiring ownership from the senior generation. By working with a PEG in such a succession transaction, active family members secure operating control and significant equity ownership, while gaining a financial partner for growth.

Recapitalization – This is an option for an owner who wants to sell a portion of the company for liquidity, while retaining equity ownership to participate in the company’s future upside potential. This structure allows the owner to achieve personal liquidity, retain significant operational input and responsibility, and gain a financial partner to help capitalize on strategic expansion opportunities.

Growth Capital – Growing a business often strains cash flows and requires significant access to additional working capital. A growth capital investment permits management to focus on running the business without constantly having to be concerned with cash flow matters.

PEGs have become a major force in the acquisition and investment arena. They can also be thought of as strategic acquirers in certain instances, when they own portfolio companies in your industry or a related area that addresses the same customer base. These buyers may be in a position to pay more than an industry or strategic buyer that does not have this financial backing.


  • Mark Borkowski is the president of Toronto-based Mercantile Mergers & Acquisitions Corp., which specializes in the sale of mid-market companies sold to strategic buyers or private equity firms.

    Originally published in Advisor's Edge Report