As we have discussed in prior articles, equity funds are currently sitting on a sizable amount of dry powder (dry powder refers to capital raised that is unspent and available for investing purposes). In fact, a few months ago it was reported that equity firms had nearly $500 billion stocked away looking for deals to invest in.
So I find it really interesting that despite already sitting on a significant amount of dry powder, equity firms continue to have little trouble raising additional funds. According to Dow Jones, 201 U.S.-based private equity funds collectively raised $64.7 billion in the first half of the year, a 35% increase in capital committed over the $47.8 billion raised by 225 funds during the first half of 2010.
Although this total pales in comparison to the record amounts of capital raised in 2007 and 2008, it is an excellent indication that investors continue to see equity funds as a good place to invest their money. For example, in an earlier article we discussed the plans the Illinois Teacher Pension Fund has to significantly increase the portion of its retirement pool invested in private equity. In fact they are planning on increasing the amount invested in these funds by $900 million to $1.4 billion every year for the next five years. And this is just one example of a pension fund increasing its commitment to private equity. There are lots of others.
This trend is not just isolated to the U.S. Again, according to Dow Jones, 62 European private equity funds also collected $24 billion in commitments during the last quarter. Fundraising in Europe is up 48% from the $16.2 billion raised for 76 funds a year prior. As is true in the U.S., fundraising in Europe during the first half of 2011 was the strongest first half for fund-raising since 2008.
Be Buyer Ready
So what does all this mean to you as an owner of a moving into the middle market to make investments, don’t rule this group out when you think about potential buyers.? Simply this: More capital available for investing means better opportunities for you to find an optimal buyer for your business. Certainly not every middle-market company is a viable target for an equity firm. These professional buyers have specific characteristics that they are looking for when they examine potential investment opportunities. However, given that more and more equity firms are
Since these buyers typically look at several hundred targets before settling on one, it will be vital that you present your company in the most favorable light possible. Accurate, clear and detailed documentation is critical to finding an optimal buyer. The first step in this process is finding out how much your company is worth in today’s market. Too many business owners do a poor job on this step—most of you are not financial experts. A valuation of your company needs to look at more than simply the value of your real estate or inventory. Optimal buyers buy companies because of the return they can make on future earnings.
Since you have probably been understating your company’s income for years, “recasting” your financials is critical. For those of you unfamiliar with the term, recasting refers to eliminating items from your financial statements items that are unrelated to the ongoing businessof your company. These can include items such as discretionary expenses and non-recurring revenues and/or expenses. Recasting essentially provides an economic view of your company as if management dedicated to maximizing profits ran it. It also allows you to show your company in a comparable light with other investments that buyers may be examining (since chances are good that those other targets will have recast financials). It is a fully legal and accepted accounting practice. However, if you have never done it, the task can be daunting.
The only way to get this critical first step done right and becomeis to obtain the services of an experienced M&A advisory firm. Look for firms that not only will value your company but will also stand behind their valuation and take you to market. This is vital. Firms that only provide valuation services but do not offer M&A advisory guidance will not be able to help you find an optimal buyer once the valuation is completed. So get this step right and know what your company is worth BEFORE you go to market.
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