Why do so many business owners allow the true value of their companies to be stolen by Private Equity firms?

Posted on by Stanton Associates


There are estimated to be about 2,000 Private Equity (“PE”) firms in the US who buy middle market companies (that is companies with revenues from $10 million to $500 million). In general, PE firms have shown an ability to offer a superior return to the limited partners who provide their investment capital. This must be true or they would no longer exist.

On average within 5 years of buying a company a PE firm will sell it again, often for more than double the price they paid.

How do they do this? How can so much value be created so quickly when it may have taken the original owner 25 years to build up his/her company? Without question, most PE professionals are very clever and well-educated, and they can bring skill and knowledge to the companies they buy to create additional value. However, they aren’t geniuses either, and their knowledge and skills are not proprietary and unique. They will rarely reinvent the product design, core engineering, or the services. Instead, they bring a disciplined approach to driving value creation: a focus on revenue growth and gross margin expansion; upgrading business processes; and a commitment to professionally managing by the numbers.

So, PE firms view middle market companies as this ripe field of potential to which they just need to apply their business know-how in order to harvest the opportunity, because the middle market business owners did not do it themselves. Really this is letting the PE firms steal the true value from the business owners. What PE firms do is perfectly legal. The crime is letting them do it.

But why don’t owners unlock the potential in their businesses before selling to a PE firm or other buyer? In many cases, owners are unaware of how to go about effecting the full set of changes needed to drive value creation. But the simple fact is they can. With the right assistance, business owners can develop and execute a plan that will deliver significant value creation – and then they can sell the company. That means the long-time founders/owners of the company get to keep the intrinsic value, rather than let it be stolen by a PE firm.

I’d love to hear what you think about this issue. Please let me know in the comments section below.

Learn more about our approach to helping business owners unlock the value of their companies.

About Stanton Associates: Stanton Associates is passionate about helping business owners unlock the value in their companies and keep it for themselves. We are different from most exit planners. Like others we help prepare the company for sale and guide business owners through the process. What sets us apart is our ability to drive significant value creation. It is our mission to ensure that business owners don’t allow to be stolen what is rightfully theirs. Members of the Stanton Associates team have been the CEO, CFO, COO, CMO and Head of Sales at many mid-market companies. We know what it takes to drive value creation prior to an exit.


6 Responses to this post

  1. Bob Bellano says:

    In Many cases owners get a comfortable lifestyle , bring on family members and don’t want to make the tough decisions to go to next level. Also going to the next level can involve higher level risk especially when most of their net worth is tied up in the business – that’s where firms like rhl come in with cash to propel growth while owner remains an investor –

    What percentage of all PE deals are family owned businesses – ??
    the other PE deals are corporate carve outs and pre
    existing PE deals that are sold to another PE firm

    Their are owners with drive and risk taking taking skills that don’t need PE firms except for cash to grow eg meruelo etc but they are the rarity

    • Lewis Stanton says:

      As per usual, your thoughts are insightful and informed. Obviously not all PE deals fit the profile on which I wrote and the complete dissertation would be more nuanced and very lengthy. This was just a short blog. And if shareholders don’t want to get to the next level then my firm can’t help them. The premise is that they can if they want – with a little help. Also, the changes would actually reduce risk not increase it: improved sales, gross margins, operations, financial information etc. are always good.
      Best wishes,

  2. Tony Vickers says:

    A good piece that describes an all too common situation well.

  3. Donna Myrow says:

    Interesting piece. I have several friends facing this situation, ready to cash out, family not willing to work hard to sustain business.

  4. Lewis Stanton says:

    A friend of yours is a friend of mine! I am happy to talk with them to see what can be done to ensure they don’t have the true value of their businesses stolen.
    Best wishes,

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