As private equity gets hungrier for new deals family businesses become more sought after

Private equity firms remain keen to acquire family businesses presenting founders with exit options during a period of market volatility, as potential suitors line up. Home to an estimated 5.5 million family-owned businesses, the US offers fertile ground. 

Lindsey Day, co-chair of the closely held and family business team at US law firm, Lathrop GPM, observes that while PE groups are commonly known for billion-dollar buyouts, their focus has shifted, with some bending over backwards to court family businesses. 

Historically, you wouldn’t have thought of sectors like HVAC attracting third-party investments. Now, with all the private equity money, there’s an opportunity that these founders probably wouldn’t have anticipated ever being there

“This is an excellent time for a family business to pursue private equity. Demand is very high, which means they have more leverage in the sale process. Historically, you’d maybe get one or two offers. Now, it’s not uncommon to see three or four very attractive offers,” says Day. This gives founders a lot more flexibility on deal terms. Post-sale, they may only want to stick around for 12 months, and while buyers would generally prefer this to be three to five years, founders are increasingly prevailing in this position. Day says this is: “because PE funds are so anxious to get good companies under their belt”. 

Part of the reason family businesses end up going towards private equity or some other purchaser is the challenge of transitioning a business to new generations.

Many of these businesses don’t have an heir apparent. And if they do, it can lead to friction between family members who are not part of the business and those who are. “From a simplicity standpoint, and given the multiples being offered, people are opting to pursue that approach as opposed to transition within the family,” says Mark Williamson, partner at Lathrop GPM, where he focuses on mergers and acquisitions. 

The First Bank Center recently cited the lack of succession planning for Family-Owned Businesses. Its survey found that only 27% of businesses have a succession plan in place. 

That is playing to the advantage of PE groups seeking access to cash flow, with manufacturing, heating, ventilation and air conditioning seen as attractive sectors in which to seek out deals. SaaS companies with recurring streams are another hot area, and as Williamson notes: “Even garage door repair companies, where you sign up for monthly care plans, are starting to attract private equity dollars. 

“Historically, you wouldn’t have thought of sectors like HVAC attracting third-party investments. Now, with all the private equity money, there’s an opportunity that these founders probably wouldn’t have anticipated ever being there.” 

Examples of this trend include firms such as St Louis-based Weis Comfort Systems, established by Dan and Tom Weis in 2010. Whereas once they would embark on buying up smaller competitors, higher valuation costs led to their eventual decision to sell the business to a PE-backed platform. 

Day continues to see a lot of activity in the manufacturing space. “The demand for manufacturing companies remains a focal point for a lot of PE firms…for example, businesses that are creating components for medical devices, military companies etc.” 

This is far from a US-only growth trend. In the German Mittelstand, there were 43 MBO transactions last year, with family owners selling to financial investors in 27 of those transactions. Again, the primary issue for this seems to be a lack of succession options for founders. According to one survey, 79% of Mittelstand businesses consider this a problem. 

PE firms such as Battery Ventures have focused on Mittelstand software companies to build them into resilient, sustainable businesses. 

One example of a Mittelstand company selling to a foreign buyer is Viessmann, a family business founded in 1917. In April 2023, the family sold its heat pump business to Carrier Global Corp for a reported EUR12 billion. Under the terms of the deal, Max Viessmann, the great-grandson of Johann Viessmann, will have a seat on the board. 

Although not a PE sale, it serves to illustrate the fact that multi-generational family businesses can attract significant buyer interest. 

In Australia, Sydney-based Chargrill Charlie’s was sold in May 2023 to PAG Asia Capital, a private equity group, to become part of its Craveable Brands business. Chargrill Charlie’s was founded by the Sher family in 1989. 

Williamson says more independent sponsors are looking to do deals, executing them on an individual basis before structuring a formal fund. One of his clients runs a ‘search fund’, designed specifically to invest in independent sponsors, providing yet another tailwind for family businesses who are considering cashing in. 

When asked to expand on the lack of confidence that some founders have, in regards to handing over the reins to the next generation. Williamson stresses that while many of them do have succession plans in place, they realise the person they picked is not suitable to run the company,  or interested in other things.

“We are working with one family business where one of the children was expected to lead the company. It didn’t pan out, and they’ve had to appoint another family member. They’ve made it a priority to get non-family members involved, so they do have a strong executive team in place,” he says. 

The fact that PE firms are accommodating favourable deal terms, allowing founders to sell in short order, is a new trend, but it is one that is likely to continue in this current environment. Still, it does depend on the individual founder. 

“Some founders have reached that point in life where they just want to do something different. If they break away, they want to be completely broken away. But then there are other founders who can’t quite let go and want to stick around for a couple of years. I’m not sure that minority ownership by a PE firm achieves everyone’s goals, as much as a complete buyout,” says Day.