Mid-market companies find themselves in a quandary when it comes to obtaining much-needed capital to grow. This segment of the US economy, if measured on its own, would rank the fourth largest in the world. Yet a 2015 survey by GE Capital and Ohio State University’s College of Business found that 55 percent of middle market businesses do not have sufficient access to funding.
Few options exist. Global financial institutions focus on larger organizations, while small enterprises can apply for SBA loans. Banks, while offering more loans than at the height of the Great Recession, are still keeping their purse strings tight and don’t meet the growing demands of mid-market businesses.
Accessing capital for these type of companies will need to take a different route; one that will require business owners to take some chips off the table. In short, unlocking the wealth in a company may come from giving up some ownership to private equity groups. These entities exist to invest private and institutional assets, such as pension funds and university endowments, in privately held businesses. Private equity groups seek out mid-market firms due to their potential to achieve faster growth and value creation than large, public companies.
Moreover, private equity groups hold large sums of cash that they need to invest. Estimates of private equity money sitting on the sidelines range from $500 billion to $1 trillion. The funds provided in exchange for a minority percentage of ownership can fuel many initiatives for mid-market business owners including:
• Payoff commercial bank debt –- and eliminate personal guarantees.
• Pursue and fund acquisition opportunities.
• Finance new product development.
• Expand operations by acquiring new equipment, expanded facilities, etc..
• Recapitalize the balance sheet to support growth.
• Buy out a retiring shareholder or partner.
Business owners can also diversify their assets by partnering with a private equity firm and taking the cash to invest in assets other than their company. Somewhere around 70 percent of privately held business owners have most, if not all, of their assets tied up in their company. Bringing in a private equity group as a minority owner can allow owners to take some chips of the table while still controlling their company’s future. This strategy can work for businesses with $15 million or more in annual revenue.
Private equity groups evaluating companies to make minority investments will base their decision in large part on the ability of the business’ management team to grow if given additional resources. A good cultural fit will also be a determinant factor. Regardless, a company considering accepting such a partner will want to generate interest from multiple groups. This will be crucial to obtaining the highest valuation and most cash for the least amount of ownership. Seek the advice of a licensed investment banker if you’re curious about the process of creating a competitive bidding environment with private equity groups. It can provide even greater opportunities when you do.