When the owner of an HVAC company decides to sell, they usually have two main goals for their deal. One is the legacy goal: ensure that the company they worked so hard to build continues to operate successfully and take care of its customers and employees.
The second goal is a financial one: getting top dollar for the business. These goals are not mutually exclusive, but the buyer pool will look different depending on which is more important to the seller. Here are some things a seller should understand about Private Equity buyers versus traditional buyers.
Private Equity buyers are cash buyers. They are using their investors’ money, so they are not subject to the constraints of lenders, especially SBA lenders. An SBA loan is capped at $5 million, so buyers not backed by PE will need to secure additional financing to acquire large companies. PE buyers can also move faster, since the decision-making and approval process is internal and not subject to a team of underwriters. That means that the diligence process, negotiations, and closing might take considerably less time than with a traditional buyer. That matters to sellers who are ready to exit the business right away.
Making the numbers work for PE buyers looks different than it does for traditional buyers. When a traditional buyer applies for financing, the numbers must make sense for the lender. The current cash flow must cover debt service, normal operations, and provide a reasonable salary for the new owner or manager. If the business doesn’t have sufficient cash flow, the buyer won’t be approved.
PE firms often operate many companies in the same industry, making economies of scale a significant buying advantage. They can negotiate lower prices for equipment, vehicles, employee benefits, and other important assets and services because they buy in larger quantities. So they are less concerned with the company’s current cash flow than with its future cash flow under their umbrella. This is why they can make offers for businesses that are above most traditional buyers’, even above market valuation; they know that by increasing revenue and cutting costs, they can make the company profitable.
PE firms buy companies to grow them and sell them again in a relatively short time frame. If a seller’s top priority is the company’s legacy, a traditional buyer with industry experience might be a better fit. PE firms may come in and immediately start cutting costs, including labor costs, and eliminating inefficiencies. They will prioritize revenue growth and keep their focus squarely on profitability. Within three to five years, they often will sell the larger and more profitable company to someone else.
This reality is something a seller must consider before choosing the right buyer for their business. Most sellers would prefer to get a larger payout from the sale or to get a second bite at the apple in a few years. But not all. If the owner’s priority was building a business for their family’s future or remaining locally owned and operated, selling to a PE firm may not be the best choice.
Every business deal is unique, and every buyer has the right to choose who they want to sell their company to. Making the right decision for your company will be based on both financial and legacy goals. But making an informed decision is critical.
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