Don’t Stay Past Midnight – Reflections on Knowing When to Sell Your Business (Part 4)

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If you’ve been with us for one or more of the prior weeks, you know that we’ve been walking through a list of six ways to objectively determine if it might be a good time to consider the sale of your private business.  Last week’s blog touched on the exercise of comparing the expected after-tax proceeds from a sale to your “Number” (i.e. the amount you need to achieve from a sale to meet your vision for life post transaction).  In summary, if a sale allows you to clear your pre-defined goal, then you may have yet another objective input to your decision to consider an exit.

This week, we’re going to explore #4 below which takes the analysis up a level and examines the state of the industry in which you’re operating:

  1. Valuations are Historically High
  2. You’ve Experienced Multi-Year Growth in Revenue and Profits
  3. Expected Proceeds from an Exit Exceed Your Previously Defined Goals (i.e. You’ll Hit Your “Number”)
  4. The Industry is Experiencing Tailwinds from Positive Trends
  5. Value Remains for the Next Buyer
  6. You See Your Competitors Deciding to Sell

If there’s one thing we’ve learned from investing in private companies for nearly 20 years, it’s that getting the industry right is a powerful force in driving good investment outcomes.  Not to oversimplify things, but Good Industry + Good CEO has proven to be more than half the battle in most cases. So, we pay close attention to the industry in which a company is operating if we are considering making an investment.  Here are some more detailed reflections on how to think about the state of your industry:

  • The Industry is Experiencing Tailwinds from Positive Trends. As a private equity investor we like growth, but we don’t necessarily look for rapid growth in an industry to compel the pursuit of a deal.  In fact, if we see graphs with industry growth rates that are too steep, we may often conclude that the sector is better suited for a VC investor who has the stomach for the valuations that accompany such growth.
  • In general, we want to invest in companies whose industry growth is comfortably beating GDP for tangible reasons, and we’ve historically pursued businesses operating in sectors with 5-15% expected annual growth for the foreseeable future.  Ideally, this growth is being propelled by factors that are easy to understand, concrete and sustainable.  Said another way, if you can explain why your industry is growing to a family member with no prior familiarity of it, then that is a good starting point.  Further, all industries go through cycles, so if you are currently on an upswing and can explain in simple terms why favorable trends are likely to persist, then this should resonate with investors.
  • Here’s a simple example to illustrate how an investor might evaluate the relative attractiveness of your business based on the growth of the industry in which you’re operating:

Stay tuned for the next blog where we’re going to address point #5 above, Value Remains for the Next Buyer.  As always, we’re interested in your feedback.  To start a conversation, please reach out to Joe Schmidt (jjs@clearlightpartners.com) or Mark Gartner (mpg@clearlightpartners.com).

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About ClearLight Partners

ClearLight is a private equity firm headquartered in Southern California that invests in established, profitable middle-market companies in a range of industry sectors. Investment candidates are typically generating between $4-15 million of EBITDA (or, Operating Profit) and are operating in industries with strong growth prospects.  Since inception, ClearLight has raised $900 million in capital across three funds from a single limited partner. The ClearLight team has extensive operating and financial experience and a history of successfully partnering with owners and management teams to drive growth and create value.  For more information, visit www.clearlightpartners.com.

Disclaimer: The views and opinions expressed in this blog are solely my own and do not necessarily reflect any ClearLight opinion, position, or policy.

Don’t Stay Past Midnight – Reflections on Knowing When to Sell Your Business (Part 3)

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Welcome back to our blog series that tells you, a business owner, how we, a private equity fund, determine the proper timing to consider an exit.  Having been investing in private companies for nearly 20 years, this is a question with which we have had to contend many times.  As a result, we respect that it can be challenging and stressful, but if you strip away the emotion surrounding the exercise, you’re left with common sense indicators that can help you make an objective decision about when to sell.  These indicators are presented in the list below.

We’ve previously explored points #1 and #2.  This week, you guessed it, we’re going to touch on point #3 in more detail:

  1. Valuations are Historically High
  2. You’ve Experienced Multi-Year Growth in Revenue and Profits
  3. Expected Proceeds from an Exit Exceed Your Previously Defined Goals (i.e. You’ll Hit Your “Number”)
  4. The Industry is Experiencing Tailwinds from Positive Trends
  5. Value Remains for the Next Buyer
  6. You See Your Competitors Deciding to Sell

We could have also probably titled this one, “Pigs Get Fat, Hogs Get Slaughtered” but decided to go with a softer delivery.  Take a look at how we think about this point:

  • Expected Proceeds from an Exit Exceed Your Previously Defined Goals. Most professional investors have a pre-defined notion of what “good” looks like from a returns perspective. Classically, in the private equity business a good outcome is doubling or tripling your money in around 5 years.  Private equity funds might also describe success in terms of IRR %.  Therefore, when considering an exit, if a private equity firm has reason to believe that a sale will generate returns that exceed its pre-defined thresholds, then this becomes a fairly black and white input that helps inform the exit decision.  The benefit of defining these metrics ahead of time is that it wards off the judgement clouding effects of fear, irrational optimism, and/or whatever your gut is telling you that day.

  • However, returns metrics are likely not how you as a business owner are looking at the world.  We’ve found that many entrepreneurs have a round number (after tax) in mind that they want to hit in order to have a post-transaction existence that fulfills their visions for the next phase of life.  This number might contemplate future travel, real estate purchases, boats, starting a new business and/or allocation of the sale proceeds to family members.  So, using the information available to you regarding valuation multiples, you should have a pretty good idea of whether a sale will allow you to hit your number.  If it does, then considering an exit might be a good idea.

  • Here’s a simple example to drive home the point:

Stay tuned for next week’s blog where we’re going to address point #4 above, The Industry is Experiencing Tailwinds from Positive Trends.  As always, we’re interested in your feedback.  To start a conversation, please reach out to Joe Schmidt (jjs@clearlightpartners.com) or Mark Gartner (mpg@clearlightpartners.com).

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About ClearLight Partners

ClearLight is a private equity firm headquartered in Southern California that invests in established, profitable middle-market companies in a range of industry sectors. Investment candidates are typically generating between $4-15 million of EBITDA (or, Operating Profit) and are operating in industries with strong growth prospects.  Since inception, ClearLight has raised $900 million in capital across three funds from a single limited partner. The ClearLight team has extensive operating and financial experience and a history of successfully partnering with owners and management teams to drive growth and create value.  For more information, visit www.clearlightpartners.com.

Disclaimer: The views and opinions expressed in this blog are solely my own and do not necessarily reflect any ClearLight opinion, position, or policy.

How to Create Deal Sourcing Alpha

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Read time: 3 Minutes

“It is impossible to produce superior performance unless you do something different.”

(John Templeton)

In an investing context, “alpha” is a term used to describe a strategy’s ability to beat the market.  Simplistically, it could also be thought of as excess return.  Therefore, alpha from a deal sourcing perspective would be generating investment opportunities that your competition is not also seeing.  In the current state of the private equity game, alpha generation in deal sourcing is essential given elevated competition for the precious few higher quality opportunities in the market. 

While the deal sourcing role within private equity funds has evolved and grown more professionalized over time, there continues to exist several flavors of staffing and strategy.  However, one thing is clear – the “order taker” model of reactively waiting for widely-shopped deals to find you simply because you have a fund will not survive over the long term.  How then is a fund to produce leads that their peers are not also seeing?  Here are some ideas for strategic consideration – figuring out the tactics is up to you. 

  1. Develop a thesis. Sometimes this is easier said than done.  The bottleneck with this approach is having the good idea to begin with, but deal sourcing professionals observe every deal that comes in the door and should be able to recognize patterns that point to good investment ideas.  Once a sector has been chosen, the disciplined exploration and documentation of an industry’s trends, risks, opportunities, competitors, etc. will yield well-organized knowledge that can be used to approach targets and relevant referral sources proactively.  Further, an ancillary benefit to developing a thesis is being able to respond quickly and with conviction to deals from that industry that come in through traditional auction processes.  Everyone is looking for an angle in auctions – having a well-vetted thesis in the can is one of them. 
  1. Cultivate deep relationships with proven executives from sectors you like. Many executives have enjoyed long-tenured careers within sectors relevant to your investing efforts and have the respect and contacts to show for it.  Off-market deals tend to find their way to these industry luminaries, often before a business goes to a full auction.  These individuals will give your firm added credibility in speaking with business owners and often add significant value post-closing.  Therefore, you need to have an engine that identifies such individuals and nurtures ongoing relationships with them.
  1. Get smarter about marketing. Most firms are still trying to figure out what marketing means for a private equity fund.  However, leaders on the marketing front have emerged and have resources behind an array of channels including email campaigns, print publications, social media, and participation in various in-person events as moderators, panelists, etc.  The challenging part is getting ahold of the right metrics to quantitatively assess ROI, and the exercise is often muddled by the understanding that one deal can justify a year’s worth of marketing spend.  You may have heard John Wanamaker’s famous quote, “Half the money I spend on advertising is wasted; the trouble is I don’t know which half.”  Sophistication in private equity marketing means consistently driving down wasted advertising spend and not narcissistically gazing into the reflecting pool of vanity metrics at the top of the funnel.  It means generating differentiated, actionable leads that turn into indications of interest.
  1. Purposeful, proactive interactions with intermediaries. Intermediary coverage has gotten harder, largely due to the proliferation of newer, inexperienced sourcing professionals that annoy busy investment bankers with meaningless check in calls.  The good news is that you can do it better, and if you do it right, you’ll unearth hidden opportunities. This happens because by expressing proactive interest in specific sectors, you’ll trigger connections in the mind of intermediaries who can help with introductions to executives and/or businesses that are perhaps too small for a formal process.  It also gives you something interesting to talk about besides the weather in their particular city and positions you as a source of value-added information.         
  1. Go local. All things being equal, a fund should have a relative advantage over their competition in pursuing local deals.  Perhaps this is because dealing with local parties feels inherently more familiar and mollifies certain anxieties surrounding deal discussions.  Also, in most cities, the number of eligible lower middle market companies vastly outnumbers the list of private equity funds, so this creates a motivation to embrace and build a relationship with the local business community. In Orange County, for instance, there are around three million people and only a small handful of dedicated funds.  The numbers are likely in your favor.

As always, I’m interested in your reactions and comments.  Fire away with feedback about anything I’ve missed or your experiences with these strategies. 

About ClearLight Partners

ClearLight is a private equity firm headquartered in Southern California that invests in established, profitable middle-market companies in a range of industry sectors. Investment candidates are typically generating between $4-15 million of EBITDA (or, Operating Profit) and are operating in industries with strong growth prospects. Since inception, ClearLight has raised $900 million in capital across three funds from a single limited partner. The ClearLight team has extensive operating and financial experience and a history of successfully partnering with owners and management teams to drive growth and create value. For more information, visit www.clearlightpartners.com.

Disclaimer: The views and opinions expressed in this blog are solely my own and do not necessarily reflect any ClearLight opinion, position, or policy.

Don’t Stay Past Midnight – Reflections on Knowing When to Sell Your Business (Part 2)

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If you tuned in last week, you know we’re amidst a blog series on how to know it’s the right time to sell your business.  Last week, we explored how it can be hard to time an economic cycle but that assessing the relative strength of purchase multiples in your industry compared to historical averages is an objective exercise.  If multiples are high, and the timing is right for you personally, it could make sense to consider an exit lest you miss the window.   

This week, we’re going to touch on point #2 in the list below:

  1. Valuations are Historically High
  2. You’ve Experienced Multi-Year Growth in Revenue and Profits
  3. Expected Proceeds from an Exit Exceed Your Previously Defined Goals (i.e. You’ll Hit Your “Number”)
  4. The Industry is Experiencing Tailwinds from Positive Trends
  5. Value Remains for the Next Buyer
  6. You See Your Competitors Deciding to Sell

Having been investing in private companies for nearly 20 years, this next point is a key attribute we look for when determining whether to proceed with an investment opportunity.  So, without further ado:

  • You’ve Experienced Multi-Year Growth in Revenue and Profits. Bruce Lee said, “Long-term consistency trumps short term intensity.” This certainly applies to how investors will assess the quality, sustainability and growth potential of your company’s cash flow.  For instance, if you have a great year with outsized profitability, it can be tempting to conclude that you should exit to capitalize on a multiple being applied to your inflated earnings.  However, if your pop in EBITDA seems to be attributed to one-time revenue wins or other unsustainable factors, a buyer is not likely to give you full credit for it.  Further, if your financials have had significant volatility over the years such that there are a lot of ups and downs one year to the next, you’re not going to garner the same multiple as a business that elicits more confidence in future growth.

  • Conversely, if you have generated a steady upward trajectory in revenue and profits across multiple consecutive years, it will increase a buyer’s conviction that your historical results are replicable.  Given that the economy has been relatively healthy since the recovery from the Great Recession, we like to see steady growth at the top and bottom line since 2011 or so through the present.  The following exhibit will give you an idea for how an investor might value a company based on its historical performance:

Stay tuned for next week’s blog where we’re going to address point #3 above, Expected Proceeds from an Exit Exceed Your Previously Defined Goals.  As always, we’re interested in your feedback.  To start a conversation, please reach out to Joe Schmidt (jjs@clearlightpartners.com) or Mark Gartner (mpg@clearlightpartners.com).

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About ClearLight Partners

ClearLight is a private equity firm headquartered in Southern California that invests in established, profitable middle-market companies in a range of industry sectors. Investment candidates are typically generating between $4-15 million of EBITDA (or, Operating Profit) and are operating in industries with strong growth prospects.  Since inception, ClearLight has raised $900 million in capital across three funds from a single limited partner. The ClearLight team has extensive operating and financial experience and a history of successfully partnering with owners and management teams to drive growth and create value.  For more information, visit www.clearlightpartners.com.

Disclaimer: The views and opinions expressed in this blog are solely my own and do not necessarily reflect any ClearLight opinion, position, or policy.

Don’t Stay Past Midnight – Reflections on Knowing When to Sell Your Business (Part 1)

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As of today, we are currently amidst the second longest period of economic expansion in our nation’s history.  To put this in perspective, between 19451 and the trough of the Great Recession in the late 2000’s there have been 11 periods of expansion that lasted, on average, 59 months.  Presently, we’re around 118 months into a growth cycle.  So, it’s hard not to wonder about when the next recession is going to arrive given that it seems content to be fashionably late.

You’ve probably heard the saying, “Pigs get fat, hogs get slaughtered.”  This essentially means, do your best to maximize your outcome, but don’t wait too long and miss out on the prudent window to sell.  As investors, we can’t and don’t attempt to time economic cycles, but there are indicators that we’ve learned to recognize in evaluating the best time for an exit.  In this multi-part series, we’re going to explore the following six business and market conditions that suggest that the timing could be right:

  1. Valuations are Historically High
  2. You’ve Experienced Multi-Year Growth in Revenue and Profits
  3. Expected Proceeds from an Exit Exceed Your Previously Defined Goals (i.e. You’ll Hit Your “Number”)
  4. The Industry is Experiencing Tailwinds from Positive Trends
  5. Value Remains for the Next Buyer
  6. You See Your Competitors Deciding to Sell

To kick off this series let’s start with a topic that we’re living in real time as investors:

  • Valuations are Historically High. You can’t plan for a favorable market to exit, but there’s more than enough data readily available to help you assess where valuations sit relative to historical levels. If valuations are at a premium to where you bought in and/or are elevated compared to prior averages, this can be a positive indicator that the timing for a sale is good. 
  • In case you’re wondering, “Yes, Virginia, valuations are indeed historically high.” This is due to a host of factors including a substantial amount of uninvested capital (or, “dry powder”) controlled by an increasing number of private equity funds, sustained low interest rates, and the emergence of other types of investors (e.g. family offices, search funds).  To put some numbers around the discussion, please see the chart below that highlights the average EBITDA Multiples for companies valued between $25-$250MM.  There have been some ups and downs over the past several years, but it’s an undisputed seller’s market right now.

Source: Pitchbook
  • And, don’t just take my word for it.  Andrew Carnegie said, “As I grow older, I pay less attention to what men say.  I just watch what they do.”  Consider how people who do this for a living, the private equity community, have behaved in this period of elevated valuations – many are selling anything that isn’t nailed down.

Stay tuned for the next post where we’re going to address point #2 from the list above, You’ve Experienced Multi-Year Growth in Revenue and Profits.  As always, we’re interested in your feedback.  To start a conversation, please reach out to Joe Schmidt (jjs@clearlightpartners.com) or Mark Gartner (mpg@clearlightpartners.com). 

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1 We begin this measurement period at 1945 which is when many economic indicators became standardized and thus creates a good baseline for objective analysis.

About ClearLight Partners

ClearLight is a private equity firm headquartered in Southern California that invests in established, profitable middle-market companies in a range of industry sectors. Investment candidates are typically generating between $4-15 million of EBITDA (or, Operating Profit) and are operating in industries with strong growth prospects.  Since inception, ClearLight has raised $900 million in capital across three funds from a single limited partner. The ClearLight team has extensive operating and financial experience and a history of successfully partnering with owners and management teams to drive growth and create value.  For more information, visit www.clearlightpartners.com.

Disclaimer: The views and opinions expressed in this blog are solely my own and do not necessarily reflect any ClearLight opinion, position, or policy.