Private equity shops the SME market

Businesses wanting to exit are finding that it is more and more becoming a sellers maket. SMEs can actively position themselves to appeal to private equity. ANDREW KENT reports.

By Andrew Kent

It is not just companies on the ASX that are getting some interest from private equity firms. While the Qantas bid has received a lot of attention in recent weeks, and the Coles bidding process continues, private equity firms are also showing plenty of interest in privately owned companies, particularly the middle market.

The gap in earnings multiples between private and publicly listed companies has grown, as ASX prices have been boosted by the investment of superannuation dollars. Most personal savings have been channelled into superannuation, which in turn has been channelled into the major equity markets around the world, with some bias toward the home-grown ASX stocks.

Given the legislative restrictions around the allocation of superannuation to personally controlled assets, potential private business owners are short of money to invest directly into a business in which they intend to have an active role, reducing the number of potential buyers, and subsequently reducing the relative value of the businesses.

What does all this mean to Australia’s private business owners? Fundamentally it should see a return to the old rule of thumb that the larger the business the higher the P/E ratio; something that was beginning to look a little shaky in recent months as private investors have focused on reorganising their superannuation arrangements before the Federal Government’s June 30 deadline.

Now business owners contemplating an exit can reposition their businesses to appeal to private equity firms. One of their principal considerations is timing. The key to this is establishing how the company can be part of a larger plan, and ensuring that the business is ready for a change of ownership.

Being part of a larger plan may involve combining up and down stream of your traditional operation with suppliers and customers, or merging with competitors or both.

Understanding these options and opportunities can assist you to see the relative value of your business as part of such a plan, as well as the value of your business if such a plan were to proceed without you (for example, involving your competitors in your place). With this knowledge you will be in a better position to negotiate, and may even decide to proactively bring this about.

Preparing your ownership structure is also essential; this involves simplifying the relationships between the owners and the company so that the transfer of ownership is a relatively straightforward process. This will be more difficult for some companies than others.

However, being in a position to act when the opportunity presents itself may be the difference between you or your competitor being the active participant in the deal.

Some professional industries have already experienced this attention from private equity. Mayne Health bought into medical practices and diagnostic firms, and WHK has been an active buyer of accounting firms and financial advisers.

In both cases, an ageing ownership base and falling business values preceded the activity. These are the conditions now facing many of the middle market companies in retail, manufacturing, transport and logistics.


Andrew Kent is a director at BizExchange.
BizExchange is an independent marketplace for business for sale or seeking investment.


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