Welcome back to Becoming a Better Business Broker in 30 Days!
This concise series title describes exactly what we hope you get out of it - becoming a broker that can close more deals with less work.
This is a friendly reminder, we're writing these blogs every day, so make sure to read yesterday's article, Optimizing Business Brokerage Profit.
Today we're rollllling into a new topic - Private Equity Roll-ups (okay, we apologize for that one).
Brokers often have a love-hate relationship with PE. On one hand, you can drive a ton of value to your Seller client if you can position them as a part of a PE roll-up strategy. On the other hand, these are often highly sophisticated Buyers who can kill you (and the deal) by a thousand cuts.
To navigate the landscape of PE you need to understand the difference between platforms and tuck-ins, how to research PE portfolios, and understand their exit strategy.
In this article, we'll discuss some tips & tricks before you enter the PE arena.
Understanding PE Roll-ups
Before you can pitch a PE roll-up, you need to understand what that means. A PE roll-up strategy involves buying multiple smaller companies in the same market to merge them into a single entity. The goal? To streamline operations, reduce costs, and enhance market share and profitability. Once this integration is complete, this new entity is worth multiples more than each company on their own. Or at least that's the theory.
But to understand this strategy you need to know the difference between Platforms and Tuck-ins.
- Platforms vs. Tuck-ins: Platforms are the initial, larger acquisitions that serve as the base for adding smaller, complementary (tuck-in) businesses. Identifying potential platform companies in your portfolio can be your ticket to engaging with PE firms.
For example, say you're a PE firm rolling up HVAC companies (such a cliché we know) and buy each HVAC business for an average of 3x EBITDA of $400,000. However, by acquiring 6 of these companies, you now have a combined EBITDA of $2,400,000, which will sell for much higher than 3x EBITDA. This multiple arbitrage is where PE really makes its money.
A common mistake we see Brokers make is pitching tuck-in acquisitions as platforms. It's pretty rare for a pure platform deal (i.e. $5M+ EBITDA) to stumble its way onto Main Street. Even if it does, it's going to be pretty difficult for a Broker to beat out the 'suits' (M&A/investment banks) to win the Engagement Agreement for that sell-side client.
As a result, Main Street Brokers should spend the majority of their time on tuck-in deals, which is done by understanding a PE portfolio inside and out.
Researching PE Portfolios
Doing your homework is critical. Start by researching the portfolios of PE firms in your area. Here are a few ways to do it:
- Use M&A Databases: Leverage databases like PitchBook, Crunchbase, or even LinkedIn to gather intelligence on PE firms' current portfolio companies. Build an understanding of their platform companies so you can match prospective Sellers as tuck-in opportunities.
- Hire Freelancers: Use marketplaces like UpWork to hire researchers who can navigate PitchBook or Crunchbase on your behalf to find recent transaction data, the public fund investment thesis, key contacts, and more.
- Network: Attend industry events and webinars where PE firms are likely to participate. Networking can provide insider insights that aren't available through public channels. Don't let your ego get in the way of rubbing elbows with that 20-something Associate either - as they often understand the firm's portfolio better than the firm's Partners. Further, they are highly motivated to source a 'good deal' they can bring to their boss.
Crafting Your Pitch
When you pitch a deal to a PE firm you have to get to the point. These firms pass on hundreds of deals per year - so you need to clearly articulate how your client's business fits in their roll-up strategy.
- Highlight Synergies: Demonstrate how your client's business complements the PE firm's existing portfolio. Focus on synergies that can drive operational efficiencies and revenue growth.
- Showcase Growth Potential: Use data and market analysis to show the growth potential of your client's business as part of a larger entity. PE firms are always looking for scalable opportunities.
- Understand Their Exit Strategy: Tailor your pitch to align with the PE firm's typical exit strategy, whether it's an IPO, a strategic sale, or another roll-up (roll-up inception). Showing how your client fits into their long-term plan can make your proposal more compelling.
Navigating Negotiations
Dealing with PE firms requires a blend of tact, persistence, and appreciation for Patagonia fleece vests (c'mon we needed to make fun of PE at least once). Be especially prepared for intense due diligence and tough negotiations.
- Anticipate Concerns: PE firms will scrutinize every detail. Anticipate and address potential concerns about your client's business upfront. As we discussed on Day 16: Due Diligence Mastery a majority of this diligence should happen before you pitch the deal.
- Don't Bank on a Single Buyer: PE firms are notorious for re-trading deals - which can lead to last-minute deal implosions. To avoid this from happening, ensure you are running a process where you can peg multiple PEGs (private equity groups) against one another. This will reduce the risk of being reliant upon a single Buyer.
Conclusion: Your PE Roll-up Blueprint
Pitching PE roll-ups takes thick skin, but for a well-prepared Broker, it can be incredibly rewarding. By understanding the PE landscape, researching potential partners, crafting concise pitches, and navigating negotiations with finesse, you can put your clients in a great position for a wonderful exit.
Stay tuned for Day 28 as we discuss strategies for Boosting Client Retention!
If you want to learn more about optimizing the profit of your business brokerage with DealBuilder, please visit our site or book a demo here.
