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Acquisitions by private equity companies of lower-middle-market businesses has become the main source of value creation for their portfolios. Buy-and-build refers to the buying of a platform company with a well-developed management team and infrastructure, and then using those capabilities to acquire one or more add on companies to build out and grow the platform. According to Boston Consulting Group*, buy-and-build activity has increased from 20% of all PE deals in 2000 to 53% in 2012. The reason for the surge is clear: buy-and-build deals generate an average internal rate of return (IRR) of 31.6% from entry to exit, compared with 23.1% for standalone deals.

PE firms look to buy-and-build strategies due to the traditionally short holding periods of private equity. The typical PE investment thesis requires its portfolio companies be bought and sold fairly quickly, usually within three to five years. PE firms structure their portfolios to invest for their limited partners and then return this investment with value appreciation within a fixed, relatively short time period.

To be successful in this strategy, PE firms work to rapidly increase revenue and profitability of their portfolio companies, in order to structure a quick exit (and high return on investment). The fastest way to drive revenue is through additional “add-on” acquisitions versus traditional organic growth. Hence, the “buy-and-build” strategy is put to work to deliver the needed rapid growth.

So what does this mean for lower-middle-market companies? It means there is allot of capital in the market ready to be put to work in consolidating highly profitable businesses in fragmented industries. According to the Private Equity Growth Capital Council, there are 2,797 private equity firms headquartered in the United States that collectively invest in 17,744 companies. With the baby boomer generation retiring at an increased pace, there will be more businesses available for purchase than ever before. It is reported that 70% of businesses in the lower middle market are projected to change hands in the next ten years. These two market dynamics colliding will likely result in continued high levels of deal flow and valuations.

Therefore, business owners seeking an exit should try to understand PE’s motivations and strategies prior to negotiating a potential transaction. Likewise, owners need to be ready to move and react to opportunities quickly. The financial rewards can be extremely high, but owners need to know what they’re getting into and be thoroughly prepared. There is more to the process than just finding the right buyer, and owners shouldn’t try to go it alone. Seek out a trusted adviser to guide you through the process – without one you’ll be at a significant disadvantage in negotiating and closing your deal.

At Align, we specialize in helping lower middle market businesses navigate the capital market landscape and execute successful transactions. We’ve facilitated hundreds of transactions totaling over $1B in value, so we’ve been where you’re going and can take you there. Going through a transaction without an adviser is like playing poker when you don’t know the rules – only to find that the other players at the table are experts. You’re at an immediate disadvantage. Let us help you level the game and ensure that all walk away from the closing table happy.

*References: Buy and Build Takes Private Equity Value Creation to the Next Level; February 19, 2016; https://www.bcg.com

We get allot of requests from early stage startups for help with their business plans, pitch decks, and seed/angel funding. While we at Align have a pretty high batting average getting our clients the funding they need, not everyone gets funding.

 Even when fully prepared, 95% of angel venture investors pitched by startups will decline to commit an investment.

That seems really daunting, we know. But, it’s a numbers game. It means there are 5% of angel or seed investors that will be willing to invest. So, what do those investors want to see to get funding? That’s the million dollar (literally) question!

Can You Do It and How Will You Do It?

Every startup that pitches an investor has the “best” idea. It’s “disruptive” and “never been done before” among many other over-used descriptions. They don’t care. They just want to know the basics: who, what, where, when, and how. The most important being the HOW. They want to know WHAT you are developing (product or service or both), WHO your leadership is, WHERE is your target market and customer, HOW will you execute, and WHEN will they realize a return?  Oh, and they also want to know exactly how you are going to use the money they give you.

It’s a Partnership

Yes, you need the capital. But you also need to make sure you’re pitching to and partnering with the right investor for the stage you are in. If you are idea or early-stage, don’t waste your time going to late-stage investors or funds. Do your research and ensure your pool of target investors lines up with your current life cycle stage, your industry, and that they have resources and expertise to bring to your organization beyond just the capital. And if that seems daunting to try and research on your own, no worries, we can help you with that.

Overall Investment

We encounter many founders that have watched too many episodes of Shark Tank and Silicon Valley – and they don’t realistically evaluate the valuation of their company. Early-stage founders and investors are extremely sensitive to valuation as it significantly impacts returns for all involved.  And founders’ ego tend to not want to give up too much of their “ownership.” Valuation is based on value. What value have you created? Be able to outline in detail your value – based on market traction, momentum, IP, operating trends so far, financial metrics, etc.

Team

Early stage investors are backing the idea and the management team. They’re betting that the management team can execute. Leadership ability, technical aptitude, prior experience, salesmanship, ambition/passion, ability to be coached, and many other attributes are things that investors will evaluate in the management team. They look for A-players. If you don’t have them, get them before you start pitching. Or, at the very least, have them committed to join pending the funding (if budget is your issue). The management team is where most deals fall apart. Investors that don’t feel confident in and excited to work with the team, they won’t invest. No matter how good the idea is.

Market & Customer

Who is your customer? It is amazing how many startups can’t answer this question succinctly. (If you can’t, call us. We can help you). Clear definition of product/service-market fit is critical. Investors want to know who will consume your good or service, and how will you get the product/service in front of them to grow volume? Pricing and distribution are components of this strategy as well – make sure you know what you are selling, for how much, and how you’re going to sell it. This is paramount because it determines the trajectory of the hockey-stick. Investors are looking for the hockey-stick – when will the market adopt the product/service and when will revenue take off?

Infrastructure

Lastly, you need to articulate how you’re going to support this growing company. First, start off with explaining how your’re going to use the investment. People, IT, marketing, advertising, etc, etc. By line item – where will the funds go? Then illustrate how you will scale the infrastructure of the business in parallel with growth. They want to see the cash burn to break-even and beyond. HR, Finance, Technology (development and support), operations, customer service, and all other applicable support areas need to be defined. Here’s a free tip: try to make as much of those costs variable and in line with revenue as possible. Fixed costs = cash burn. Then you’ll be raising money again really quickly.

Summary

So, if your business plan, pitch deck, financial plan, etc all contain the above key items, you’re likelihood of receiving investment subscriptions is much higher. Nothing’s guaranteed, but you’re far more prepared than others who don’t put the time into those details before they start the roadshows. And again, if you need help, just call us. We’ve done LOTS and LOTS of pitch decks and facilitated many, many management presentations, so we know where you’re going and what you need.