14 October 2024: Selling Your Business: Private Equity
If you’re a business owner thinking of selling your business – or a business broker representing such an owner – knowing who’s buying and what they’re buying would big a big plus, wouldn’t you agree?
Over the years, we’ve occasionally posted about where the demand for business is coming from and what types of businesses seem to be getting the most attention and how the overall market market for businesses for sale looks at a certain point in time.
WHAT WE’RE LOOKING FOR: Commercial Landscaping Businesses: Revenue: $5M; EBITDA $500k. Location: South and Southeast U.S.
in**@Wo**********************.com
One of the trends we’ve been watching and posting about since the beginning of 2022 has been the increase in smaller business acquisition driven by private equity. We’ve also noted two other trends related to that: 1) more private equity investment firms are being formed that are smaller than what has normally been the case and, 2) the minimum size of the businesses they’re considering is getting smaller.
If you’re a member of The Brokers Roundtable℠, our online support platform for business brokers, owners, lenders, Realtors and more, you’ve seen the numerous posts listing Businesses We’re Looking For and who’s contacting us to find them. But even if all you’ve done is read the weekly posts on this blog, you have a good sense of what we’ve been seeing and writing about.
This weekend, The Wall Street Journal published a story on this trend of private equity firms acquiring ever-smaller businesses.
The Demand
The story starts out describing the 43 year old owner of an HVAC company in Arizona who, after multiple inquiries over the years from such buyers, finally sold out to a larger HVAC company backed by private equity.
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From the article:
“PE firms across the country have been scooping up home services like HVAC—that is, heating, ventilation and air conditioning—as well as plumbing and electrical companies. They hope to profit by running larger, more profitable operations.
“Their growth marks a major shift, taking home-services firms away from family operators by offering mom-and-pop shops seven-figure and eight-figure paydays. (Emphasis ours.) It is a contrast from previous generations, when more owners handed companies down to their children or employees.
“The wave of investment is minting a new class of millionaires across the country, one that small-business owners say is helping add more shine to working with a tool belt.”
According to the article, private equity buyers – and we include search firms in this – have acquired about 800 HVAC, plumbing and electrical companies in the last 18 months (according to PitchBook, a venture capital, private equity and M&A database).
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Many of you have asked if our Flagship Course, “Learn How to Value and SUCCESSFULLY Sell Businesses“, could be made available on a module-by-module basis. We’re happy to report that this is now possible.
We’ve broken our Flagship into six separate modules (or module groups) to give you all the flexibility you need to learn only what you want to learn – and we’ve moved them all over to the new Brokers Academy in The Brokers Roundtable℠ . The Flagship is still available but the modules are now available individually.
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But there are many more small-scale deals that PitchBook doesn’t track, often because sellers are reluctant to report the exact benefits of the sale of their business.
We’re written often about strategic buyers and how private equity firms fall into that category more and more often. We’ve also written often about roll-ups and how private equity firms have been increasing their use of that strategy.
In the case of the 43 year old owner, his firm was acquired by a larger local firm that had itself been acquired by a larger regional firm a year earlier. That larger regional firm, Redwood Services, was majority owned by a private equity group.
The Roll Up
According to the article, Redwood acquired 35 such businesses in the last four years, the classic definition of a “roll-up“. For smaller companies, which they buy outright, they’ve been paying an average of $1 million. This suggests companies with revenue of about $2-$3 million.
But they’ve also been acquiring larger firms – like the one owned by the 43 year old – with an average valuation of roughly $20 million, in which they take a majority interest. Since being acquired by Redwood, this company, Rite Way, has seen its annual revenue increase from $30 million to $70 million.
The WSJ article explains the financial benefits to employees of an acquisition and how this phenomenon has long legs. Just scroll down the list of Businesses We’re Looking For on The Brokers Roundtable℠ and you’ll get an idea of the scope of this demand.
The Bottom Line
HVAC companies are not the only ones in the sights of private equity groups. We get inquiries for plumbing and electric contractors, commercial landscapers, auto technicians, metal fabricators, well and septic contractors, etc.; “the trades”, the hands-on guys and gals who everybody needs on a regular basis. (In fact, take a look at the business featured at the top of last week’s post in the “Businesses We’re Looking For…” box.)
But selling a business is always packed with emotion and the article also tells the story of the owner of an HVAC business in Florida who resisted selling in spite of receiving more than 100 offers since 2020. Though she finally succumbed to the inevitable, it was a wrenching decision.
Private equity firms are clamoring for such businesses – and as with anything else, the more potential buyers there are, the more likely the price will be bid up. (The full WSJ article can be seem here.)
I’d like to hear from you. What topics would you like me to cover? How can we tailor these posts to be more useful to you and your business. Let me know in the comments box, below, or email me at
jo*@Wo*******************.com
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If you have any questions or comments on this topic – or any topic related to business – I’d like to hear from you. Put them in the comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a safe and profitable week.
Joe
Searching For…
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The author is the founder, in 2001, of Worldwide Business Brokers and holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) of which there are fewer than 600 in the world. He can be reached at
jo*@Wo*******************.com