Private equity firms set up funds and solicit investment commitments from institutional or high-net-worth clients. The model of purchase typically involves 30% to 50% equity and 50% to 70% unsecured debt, with some instances of asset-based debt. So, if there is a $100 million acquisition, the PE firm will pay $30 to $50 million and then borrow the rest. For add-on acquisitions, more equity may go into the deal depending on the size.

What private equity firms look for in platform acquisitions

Here is the formula for an attractive purchase candidate as a platform, and not all of these are absolute:

1. A strong management team that will remain in place and be incentivized after the purchase.
2. No reliance on a few customers. Any customer accounting for over 10% of sales can pose a risk. (This is not always a deal-killer, but it makes it more difficult to get higher multiples).
3. Reliance on a few vendors that supply goods can also be critical.
4. Organic and sustainable growth of revenues for four or more years.
5. Strong intellectual property protection and strong brand recognition.
6. EBITDA of more than $4 million and an EBITDA margin of 10% of sales or better. Some groups require over $10 million or more of EBITDA for platforms. Some groups look for smaller.
7. A low CAPEX threshold. The buyer doesn’t have to purchase a large amount of new equipment or assets to grow the business after the sale, and the annual requirement is not substantial.
8. High accounts receivable and inventory turnover. This facilitates the conversion of profits to cash flow more quickly.
9. The seller will reinvest some of the proceeds from the sale back into the company. I have seen a 20% reinvest yield, which equals the original purchase price after the PE group sells years later.
10. Audited financial statements on a GAAP basis are helpful, and so is a quality of earnings report.

Positioning your business

A list of add-on acquisitions that the seller can share with the buyer, because their goal is to expand through acquisition and get economies of scale. Contact me, Len Friedman, if you have any questions or are ready to sell your business.