Looking to buy

PHOTO: © PHOTON_PHOTO / ADOBE STOCK

Despite headlines talking about slowing economic growth, at this time there is more money in the system than anyone can imagine, but there’s also a shortage of construction and infrastructure companies to acquire and good projects to invest in.

Theories about baby boomers seeking to sell their companies have proven false at a time when capital investment firms are seeking established construction companies to invest in or buy. The institutional investment and high-net-worth communities are crawling over each other to find projects.

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.

One of the major market shifts for the acquisition of privately held companies has been the growth in the number of Private Equity Groups (PEGs) over the past decade. These organizations number in the thousands in both the U.S. and Canada, and they have not been hard-hit by the credit crunch or the past stock market cyclicals. They have capital to invest and are looking for business acquisitions and investments.

These PEGs are “buyout groups” that seek to acquire or invest in ongoing, profitable construction businesses that demonstrate growth potential. Beyond simply buying up companies, these firms generally manage money for insurance funds, pension funds, charitable trusts, and sophisticated investment groups. They have money to invest.

PEGs have become key players in business acquisitions and have a number of different investment structures that may appeal to a business owner. They can 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.

Traditionally, the private equity market was restricted to acquiring or investing in large companies, but increased competition for those large operations has them broadening their scope. Moreover, the greater growth potential of smaller firms, as well as the appeal of having easier paths to exit their investment in the future have played a role in attracting PEGs to smaller companies.

HOW PEGS OPERATE

PEGs are typically organized as limited partnerships controlled and managed by the private equity firm that acts as the general partner. The fund invests in privately held companies to generate above-market financial returns for investors.

The strategy and focus of these groups’ investment philosophies and transaction structure preferences vary widely. Some prefer 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.

PEGs also tend to have certain things in common. They typically target companies with relatively stable product life cycles, as well as a strategy to overcome foreign competition. They tend to avoid leading-edge technology, which is what venture capitalists want, showing a preference for superior profit margins and a unique business model with a sustainable and defensible market niche.

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.

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

THE STRUCTURE OF A DEAL

Private equity buyouts and investments take many forms, including the following:

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

Employee Buyout: PEGs often partner with key employees in the acquisition of a company in which they play a key role. 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 previous generation. By working with a PEG in a family 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 flow 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.

Mark Borkowski is president of Toronto- based Mercantile Mergers & Acquisitions Corporation.