Agribusiness owners thinking of selling their company—whether to explore new endeavors or enjoy more leisure time—often look to family members, senior management, or known competitors to acquire a stake in the business.
An acceptable buyer typically pays the agreed upon purchase price with cash (on hand or borrowed if available), seller financing, and/or other current or future consideration.
Owners exploring strategic growth opportunities, such as new geographic, product, or end-user markets, may eye existing bank relationships or new debt or equity investors to finance their plans.
Such backers may not offer additional resources to the company beyond a capital infusion. An alternative to corporate buyers, commercial banks, debt/equity investors, or individuals, whether in exit mode or looking to grow a business, is private equity.
Private equity funding or private equity groups, often called PEGs, buy or partner with successful privately held companies and help grow their earnings, in part by assisting with the acquisition of appropriate add-on businesses.
Most PEGs manage one or more private funds. Consider these funds as an alternative asset class in which money managers invest their cash holdings. Examples of other asset classes include publicly traded stocks, corporate debt, real estate, and government bonds.
A typical private equity fund investor is an institutional money manager responsible for protecting and growing large pools of cash, often hundreds of millions or even billions of dollars. Think of insurance companies, university endowments, pension funds, family offices, and sovereign wealth funds.
While each private equity fund has its own investment strategies and methods, they all have one fundamental goal in common: putting the cash raised (known as dry powder) to work growing the value of the fund for its investors. The ultimate destination for the dollars invested with private equity firms are business owners looking to sell or strategically grow their companies.
Private equity groups carefully vet potential deals, starting with a close examination of a company’s current and historical financial performance, customer and vendor concentration levels, prospects for future growth, potential synergies with existing firm holdings, etc.
If a private equity firm and business owner agree to a transaction, and due diligence does not reveal any problems, the firm would typically pay the owner for a full, controlling (majority), or possibly minority ownership interest in the company, depending in part on the owner’s objectives (exit, strategic growth, etc.). Deals are routinely financed with a combination of cash on hand and secured loan proceeds.
Collaborating with a private equity firm can be a compelling option for business owners. If the objective is strategic growth, a PEG may propose a ‘recapitalization’ agreement, which allows owners to liquidate a significant portion of their equity position at closing, while retaining a reduced ownership stake in the company.
For owners selling their business, a PEG can act expeditiously, and pay for the company in cash, in full, at closing. In turn, the private equity firm can benefit from the acquisition’s relevant industry experience, business expertise, and robust network.
In most transactions with a private equity firm, individuals who have provided significant value to the company and are responsible for its success will likely be invited, if not incentivized, to remain part of the management team post-closing. This can include active owners, senior officers, and external advisors.
Finally, remember PEGs work with other people’s money and must eventually liquidate their investors’ stakes, meaning the funds must eventually exit their portfolio companies. Such divestitures can take the form of a sale to a corporate buyer or other private equity firm, or an initial public offering.
If, as intended, the sale of a portfolio company is profitable for a fund and its investors, a business owner who retained an equity stake in the company, as mentioned above, will likely enjoy another payday, also known as a “second bite of the apple.”
The bottom line here for agribusiness owners contemplating a sale or strategic growth opportunities is to thoroughly consider the advantages private equity firms can provide before committing to any transaction.
This is an excerpt from the cover story in the July/August 2023 issue of Produce Blueprints Magazine. Click here to read the whole issue.
Agribusiness owners thinking of selling their company—whether to explore new endeavors or enjoy more leisure time—often look to family members, senior management, or known competitors to acquire a stake in the business.
An acceptable buyer typically pays the agreed upon purchase price with cash (on hand or borrowed if available), seller financing, and/or other current or future consideration.
Owners exploring strategic growth opportunities, such as new geographic, product, or end-user markets, may eye existing bank relationships or new debt or equity investors to finance their plans.
Such backers may not offer additional resources to the company beyond a capital infusion. An alternative to corporate buyers, commercial banks, debt/equity investors, or individuals, whether in exit mode or looking to grow a business, is private equity.
Private equity funding or private equity groups, often called PEGs, buy or partner with successful privately held companies and help grow their earnings, in part by assisting with the acquisition of appropriate add-on businesses.
Most PEGs manage one or more private funds. Consider these funds as an alternative asset class in which money managers invest their cash holdings. Examples of other asset classes include publicly traded stocks, corporate debt, real estate, and government bonds.
A typical private equity fund investor is an institutional money manager responsible for protecting and growing large pools of cash, often hundreds of millions or even billions of dollars. Think of insurance companies, university endowments, pension funds, family offices, and sovereign wealth funds.
While each private equity fund has its own investment strategies and methods, they all have one fundamental goal in common: putting the cash raised (known as dry powder) to work growing the value of the fund for its investors. The ultimate destination for the dollars invested with private equity firms are business owners looking to sell or strategically grow their companies.
Private equity groups carefully vet potential deals, starting with a close examination of a company’s current and historical financial performance, customer and vendor concentration levels, prospects for future growth, potential synergies with existing firm holdings, etc.
If a private equity firm and business owner agree to a transaction, and due diligence does not reveal any problems, the firm would typically pay the owner for a full, controlling (majority), or possibly minority ownership interest in the company, depending in part on the owner’s objectives (exit, strategic growth, etc.). Deals are routinely financed with a combination of cash on hand and secured loan proceeds.
Collaborating with a private equity firm can be a compelling option for business owners. If the objective is strategic growth, a PEG may propose a ‘recapitalization’ agreement, which allows owners to liquidate a significant portion of their equity position at closing, while retaining a reduced ownership stake in the company.
For owners selling their business, a PEG can act expeditiously, and pay for the company in cash, in full, at closing. In turn, the private equity firm can benefit from the acquisition’s relevant industry experience, business expertise, and robust network.
In most transactions with a private equity firm, individuals who have provided significant value to the company and are responsible for its success will likely be invited, if not incentivized, to remain part of the management team post-closing. This can include active owners, senior officers, and external advisors.
Finally, remember PEGs work with other people’s money and must eventually liquidate their investors’ stakes, meaning the funds must eventually exit their portfolio companies. Such divestitures can take the form of a sale to a corporate buyer or other private equity firm, or an initial public offering.
If, as intended, the sale of a portfolio company is profitable for a fund and its investors, a business owner who retained an equity stake in the company, as mentioned above, will likely enjoy another payday, also known as a “second bite of the apple.”
The bottom line here for agribusiness owners contemplating a sale or strategic growth opportunities is to thoroughly consider the advantages private equity firms can provide before committing to any transaction.
This is an excerpt from the cover story in the July/August 2023 issue of Produce Blueprints Magazine. Click here to read the whole issue.
Michael Erdman is president of Howard Sheri Corporation, a mergers and acquisitions intermediary helping successful agriculture, transportation, and other business owners achieve their strategic growth and exit objectives.
