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Punching Out! Why Sell to a Private Equity Group?

PCB/PCBA owners often think that a short list of strategic buyers (companies in the same industry) are the only ones who would be interested in acquiring their company. One category of buyers that is often overlooked is private equity groups (PEGs). Owners either think that their company would not be of interest to a non-strategic buyer, or they have a negative impression of financial buyers.

PEGs have been very active in both the PCB and PCBA sectors. Here are just a few examples:

• PCB: Advanced Circuits (Compass Diversified), APCT (Saugatuck), Summit Interconnect (HCI)
• PCBA: Zentech (NewSpring), Masterworks (Hidden Harbor), PDS/Green Circuits (Evolve)

So, why sell to a PEG? Here are six reasons:

1. Money

PEGs have raised a lot of money in recent years, and they are looking to buy companies. Many estimates put the amount of worldwide PEG “dry powder” at over $1 trillion. Strategic buyers have money too, but they do not necessarily have a mandate to spend it all on acquisitions. One of the top criteria (besides valuation and terms) in selecting a buyer is whether or not they have money to do a deal, and PEGs have a lot of money these days. 

2. Focus

PEGs need to acquire companies to invest their funds, and they tend to grow companies through a combination of acquisitions and sales growth. Strategic buyers make acquisitions too, but they also have a business to run, so they do not always move as quickly as PEGs or PEG-backed companies. 

3. Second Bite of the Apple

Many PEGs would prefer that the owner stay with the company and keep an equity stake. This can allow the owner to take some money off the table during the initial transaction, then take a second bite of the apple a few years down the road when either the company is sold, or the PEG buys the remaining shares of the owner (hopefully, at a much higher valuation). 

4. Platform or Add-on

PEGs typically have a target range for their platform (initial) investments, such as a minimum of $3 million EBITDA, minimum $20 million deal size, etc. Even if a seller does not meet those criteria, PEG-backed companies often make add-on acquisitions that can be at a minimal level of profitability or even in the red. If a company is distressed or break-even, selling as an add-on to a PEG-backed company can be an excellent way to exit the business at a fair valuation. 

5. Professionalize the Company

PEGs look for ways to bring their companies to the next level, which means improvements in equipment, facilities, systems, certifications, management, etc. For the entrepreneur who has built a company up to a certain level but is having difficulty in getting to the next level, selling to a PEG is one way to do it. The partners in a PEG have probably built up companies many times, and they utilize the service of experts to help their companies move along. 

6. Connections

PEGs typically have a wide range of connections in a variety of markets and sectors, which can help the company grow. Whether the goal is to get into certain accounts or find an expert in a particular sector, PEGs often know a guy, or they know a guy who knows a guy. 

Pros and Cons

While selling to a PEG can be an excellent way to exit a business, it is important to understand the PEG’s strategy. Most PEGs have a standard window for their funds, so they may need to acquire, grow, and sell their companies within a certain time period such as five, seven, or 10 years. Family offices and other PEGs can have very long holding periods, but it is not always the case. To grow a business and sell it within a few years, PEGs often need to make changes quickly, so be prepared to embrace change. Many owners feel uncomfortable in this case; however, any buyer is most likely going to make changes. 

Owners often believe that PEGs do not pay as high a valuation as strategic buyers. It is mostly true that PEGs will not pay the huge all-cash valuations that some strategic buyers will pay for truly exceptional companies. However, PEGs will often pay more than strategic buyers for companies that they believe they can grow. Almost all PEGs will want a majority/control position and will use leverage (in the form of senior debt and junior debt) to boost their equity returns.

In addition to PEGs that have dedicated funds, other types of financial buyers include fundless sponsors/search funds (PEGs that find investors for each individual deal), family offices (an investment firm that invests on behalf of a wealthy family), and special-purpose groups (a group of executives who have investors or will use an SBA or similar loan to acquire a business). Owners can also consider management buyouts or ESOPs. Each group has different pros and cons. It is always important to know if they actually have money, what their strategy is for the business, and if they have any experience in the sector.

At last count, there are at least six U.S. PCB shops and over 20 EMS firms that are owned by PEGs, and that number will continue to grow as more PEGs get into these sectors. This will provide more liquidity to existing owners and will help the acquired shops invest in equipment, facilities, and systems.

Tom Kastner is the president of GP Ventures, an M&A advisory services firm focused on the tech and electronics industries. He is a registered representative of StillPoint Capital, LLC—a Tampa, Florida member of FINRA and SIPC—and securities transactions are conducted through it. StillPoint Capital is not affiliated with GP Ventures. To read past columns or contact Kastner, click here.