Earlier this week I talked about the gates you need to pass through to sell your business to a big, successful private equity firm like the Riverside Company. Today, let's examine the characteristics Riverside looks for in a business. According to its 2009 annual report, it generally seeks out companies that meet the following standards:
- Niche leaders with significant and defensible market share
- Growth opportunities (organic and buy/build)
- Diversified customer base
- Enterprise value between roughly $20 million and $250 million
- EBITDA of at least $4 million
- EBITDA margin exceeding 10 percent
- Three years of profitable history
- Management team willing to co-invest
In my experience, the first seven criteria are pretty standard fare for private equity investors. It is the eighth bullet I thought was worth spending some time discussing.
When I sold my last company, I held talks with a number of private equity firms. While each outfit had its own unique approach, most used a pretty standard buying formula: they would acquire around 50 percent of my business for a low multiple—usually around four times pre-tax profit—then they would invest some money and management talent to help me grow more quickly organically and possibly buy some complementary businesses. After a while, they would help me sell the larger, faster, stronger me to a 'strategic buyer' for a higher multiple. They wanted me to leave about half of my equity on the table, which they invariably described as the opportunity to take a 'second bite of the apple' at a higher multiple.
My initial reaction to these types of deals was twofold. First off, it appealed to me to take some of my risk off the table. The idea of pocketing some money for 50 percent of my business was attractive; my material mind turned to the things I would buy with the money.
As I considered the private equity option more seriously, however, my second thought turned to the low multiple they were offering. Most of the private equity firms justified their low bid to me by saying they would be investing substantial management resources and all of that talent would help me get a higher multiple for the second half of my equity. Most of the partners I spoke with were pretty slick, well-turned-out folks with a lot of initials after their names, so I decided to test just how much value they would add.
In one particular case, I asked a private equity firm partner for his thoughts on companies we should be pitching. He suggested we target sports teams. At the time, I had spent 10 years refining a set of five criteria a company needed to meet in order for it to be likely to buy from us. Sports teams did not meet even one of the five criteria.
His suggestion might make sense—if you didn't really know my business. To me, however, it showed how little he understood about my business and made me realize just how frustrating it would be to sell half of my company to a private equity firm. I imagined having to sit through board meetings as an MBA-type, who spent the bulk of his time on other investments, questioned my decisions.
I'm sure for the private equity firm partner, the sports-team suggestion was an off-the-cuff statement intended to demonstrate that he had been thinking about our business and that his company was an 'added value' investor. However, it just served to remind me of how much I loathe being questioned about my decision making.
For good or for bad, I like to make my own decisions. I often seek the advice of others (I'm careful to rely on the opinion of other entrepreneurs who have walked in shoes much like my own), but I need to be the one asking the questions.
In the end, I decided against the two-bite approach to selling my business.