Mergers and Acquisitions: Private Equity (PE) Firms

In some situations, you may consider acquiring a company from a private equity (PE) firm, a pool of money that buys companies with the intention of reselling them later for a sizable profit. PE firms can be very motivated Sellers.

But be warned: They’re also extremely crafty deal-makers. After all, buying and selling companies is their industry. They’re experts. Here are some considerations to keep in mind as you look at dealing with a PE firm.

Understand why PE firms sell

Because PE firms are in the game to make money (and who isn’t?), a PE firm will eventually be looking to exit its investment (which may now include some add-on acquisitions).

PE firms also hear the constant ticking of the internal rate of return (IRR), one of the key metrics they like to flaunt when raising capital. In a nutshell, the longer a PE firm holds an investment, the greater the chance the IRR will be lower than the PE firm prefers.

Evaluate a PE firm’s portfolio company

Here are a few specific suggestions to look at for a PE firm’s portfolio companies.

  • Does the company fit with your goals? This question is pretty basic, of course, but as Buyer, take care when evaluating the fit of a portfolio company with your company. Despite the great case the PE firm may make for the portfolio company, a company that doesn’t fit your goals isn’t that great a deal.

  • How will the company’s earnings affect your earnings? If the acquired company’s earnings increase your earnings, they’re accretive; if they decrease your company’s earnings, they’re dilutive. Decide whether a potential earnings hit matters to your company. Consider also whether the acquired company will eventually be able to generate higher earnings for the entire firm if earnings take an initial hit.

  • Is the company actually an integrated set of other companies? PE firms often cobble together multiple companies into one integrated firm. This setup is perfectly fine, and PE firms often do a wonderful job of integrating, but you need to be wary of just how well organized formerly disparate companies have been integrated.

  • How long has an integrated company been operating (since the last acquisition)? If the acquired company is actually a group of formerly independent companies, don’t make an acquisition too quickly. Waiting awhile (at least a year) to make sure these formerly independent companies are operating as a cohesive unit is a good idea.

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