Along with the significant increase in the value and volume of M&A transactions since the 1990s has come a similar increase in the role of private equity in these purchases. M&A was long dominated by industry and sector forces seeking expansion. The influx of private equity has now triggered a shift. Each maintains a different approach toward ownership and M&A, dependent on distinct goals that affect the unfolding of a transaction and what occurs following its completion.
Strategic buyers act as organizational integrators of multiple companies seeking greater profits based on greater realization of synergies. PE groups are professional investors whose sole goal is to sell the business at a significant profit. The two business models produce markedly different approaches to the world of M&A. The right choice for each seller depends on their goals, and both may be good fits in the right circumstances. This is why it’s so key to get sell-side M&A advice from a professional.
Here’s what sellers need to understand about the two models.
The PE Business Model is Different
PE is focused on making a smart purchase and increasing its value within an established timeframe. The goal is to move as quickly as possible toward a profitable exit. Industry buyers are more invested in long-term infinite growth, where private equity investors have a shorter timeline. The goal is to transform the business into something profitable, whatever that might be.
PE Brings a Different Strategy
Both before and after the deal, private equity has a different strategy. They are in the business of buying and selling, so they are disciplined and centralized, with a relationship-based approach. They may begin planning a deal before an actual acquisition occurs. Painstaking due diligence is critical.
By contrast to one business absorbing another, PE focuses on governance and ownership once the deal is finalized.
The Timeline With Private Equity is Finite and Short
PE firms can make more money if they can turn the business around and sell it fast. Industrial buyers have a long timeline, and play the long game. So they may be comfortable with modest but growing profits, or a plan to change the business model. When a PE firm purchases a business, it already has an exit date in mind. The timeline is shorter and finite, and PE often makes greater demands for information that can help them decided on their timeline. So due diligence becomes much more central.
