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Do Private Equity Firms Acquire Smaller Companies?

By Generational Equity

smaller companies

This is a reasonable question that we get at our M&A workshops all the time. Most business owners are under the mistaken impression that equity firms only work with very, very large companies, those valued north of $500 million or so since that is the size of deal that the business media tends to focus on. This makes sense because large transactions are widely publicized and information regarding transaction details is readily available.

The excellent news, though, is that professional buyers with equity firms are VERY interested in much smaller transactions. PitchBook, a leading research firm specializing in venture capital and private equity data, has just released its fourth quarter update (based on data through the end of September) and it shows that smaller transactions are quite popular with this buyer universe:

As you can see, thus far in 2015, nearly 50% of the deals closed by private equity firms were valued under $25 million. This is a trend we have been following for years and it tends to be stable, ranging from over 50% in 2009 and has been over 40% consistently for several years. We enjoy sharing this information with entrepreneurs because for many it is revolutionary.

The next question is Why? Why do equity firms with millions and billions to invest focus on smaller transactions?

The answer is rather simpleIntegration. Equity firms have found it far easier to acquire and assimilate smaller companies into platform companies than to acquire much larger businesses. Keep in mind that the post-sale combination of an investment firm’s acquisitions are critical. They do quite a bit of research prior to making any investment to ensure that a target is a good fit not only financially but also culturally and operationally.

If integration goes haywire on one of these transactions, the impact can be quite painful for the platform and the equity firm as well because it may impact the ROI (return on investment) they provide to their investors over the longer term.

So smaller “add-on” acquisitions are the vehicle of choice for more and more of these firms as they expand their key holdings.

Of course if you own a company in today’s seller’s market, private equity represents only one type of buyer you should be aware of. There are lots of buyers out there right now from strategic players, family offices, high net worth individuals, offshore entities, and a myriad of others. If you have not investigated the potential buyer universe for your company, consider attending a Generational Equity M&A summit. These are designed for business owners just like you who desire to learn about how and when to exit their businesses in an optimal fashion. 

Carl Doerksen is the Director of Corporate Development at Generational Equity.

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