Private equity firms hunting for deals in today’s sluggish M&A market are increasingly crowding into the lower middle-market, chasing founder-owned businesses that, in many cases, have never seriously considered a sale. But sourcing opportunities in this corner of the market is proving less about financial engineering and more about psychology.
What does it take to convince a hesitant potential target to sell? Read on to find out.
Many entrepreneurs remain deeply skeptical of private equity, shaped by stories of culture clashes, broken promises and new owners dismantling businesses built over decades. In today’s environment where competition for quality assets is extremely intense, the firms winning mandates are often the ones that can convince hesitant owners they’re buying more than a company — they’re becoming stewards of a legacy.
A critical aspect to getting a seller to consider an offer has nothing to do with the financials, says Branford Castle Partners CEO John Castle.
“One of the key skills is making sure that you listen,” he says. “If you’re a good listener and you develop a good relationship with an entrepreneur as a result, there’s a good chance that you’re going to be successful post-transaction.”
Another consideration is around price. Being willing to pay full asking price for targets in the current M&A environment puts you in strong consideration as a serious buyer, versus a bargain hunter that could make the seller wary.
“We know we need to pay full and fair prices for businesses,” Castle acknowledges. “We have a general sense for where the market is and want to pay what we feel is a market price.”
New York-based Branford Castle makes control investments in lower middle-market companies across the industrials and consumer sectors. Castle’s father, John K. Castle (also the founder of Castle Harlan), founded the firm in 1986.
Another important aspect for Branford Castle, when working with investment banks or business brokers, is sending its senior people to meet with these firms in an effort to secure a proprietary deal.
“We do that because we want to show respect and we want to be good listeners,” Castle says.
Educate
Sellers often think of a decision about selling their business as binary. But they may not be fully informed about different transaction structures if they haven’t been through an M&A process before, according to Managing Director Nick Cipiti of CriticalPoint, a Los Angeles based mid-market investment bank.
“We emphasize early process education and encourage sellers to keep an open mind through one or two rounds of bidding to help ensure our clients have a range of options to choose from at the end of a sale process,” Cipiti says. “In today’s market, there are many options available, including structured equity, minority recapitalizations that can help sellers gain liquidity and diversify their net worth while retaining operational control of their business.”
Can I Trust You?
Experts say price isn’t necessarily the most important aspect to a deal in this environment.
“Sellers are prioritizing certainty and execution over headline price, particularly in more complex situations like carve-outs or lender-driven processes,” says Transom Capital Managing Partner Russ Roenick. “The key question has shifted from ‘who is offering the most?’ to ‘who is actually going to get this done?’ From a seller’s perspective, and what we’re seeing in the market, the biggest differentiator today is credibility in execution.” Transom is a Los Angeles-based middle-market private equity firm.
Roenick says Transom concentrates on “must-sell” scenarios, such as carve-outs, lender-driven processes and long-held sponsor assets. “Where sellers prioritize a buyer who can reliably and efficiently close,” he adds.
Sellers are also looking for buyers who can clearly articulate what will happen after the deal closes, Roenick says. How the business will be run, what will change and how challenges will be addressed. “For buyers, that means coming to the table with a specific, actionable plan,” he says.
Reach Castle at: [email protected]; Cipiti at [email protected]; and Roenick at [email protected]
