Let’s say you want to grow your business. You could fund it yourself. You could get a business loan. Or you could find a partner who would fund your growth in exchange for a percent of your business. That investor is often called a “private equity” investor—or simply “PE.”
Private equity investors are frequently in the news, and it seems like every week we hear about a PE acquiring or selling an automotive aftermarket business. They have been very active within all segments of the aftermarket, including among tire dealers. PE investors can be a positive force and helpful to the overall industry, but a lot that business owners don’t know about how PEs operate and how to use them to their advantage.
The partners at Schwartz Advisors frequently work with private equity investors, and this month, we will address three key points about PEs:
- What is private equity?
- Are all private equity investors the same?
- How can private equity investors help business owners?
What are PEs?
PEs are investment companies that raise capital, usually a lot (tens or hundreds of millions of dollars). They use that capital to buy businesses and invest in growth. All businesses owned by PEs will eventually be sold, ideally for a profit. And, that’s the whole point: buy a business, invest in it, grow it and then sell it for a profit. PEs can either buy a business outright or serve as a majority or minority owner. Either way, the original owner often remains active in the business, as both parties work to grow the business.
Most PEs look for ways to grow their businesses (called portfolio companies) through improvements to operations, adding inventory, opening up new locations, buying additional businesses and other methods. PEs can often add value to a company by bringing in “best practices” that have worked at other companies the PEs have owned. Most importantly, PEs can provide the capital that is necessary to grow and remain competitive.
Are All PE Investors the Same?
Yes and no. Yes, all PEs are after a similar goal—to be in a position to sell the companies they own at a target profit. Other than that, all PEs are different; they differ in terms of size of acquisitions, types of deals they will do, geographic preferences, how long they intend to own a business that they have acquired and other transaction criteria. Some even specialize in certain markets—like the aftermarket. Many PEs like the automotive aftermarket because of its size, track record of profitability and future opportunities.
We have seen PEs buy large businesses with several hundred locations and smaller PEs buy tire dealer businesses with just a few locations. Some PEs like franchise businesses, while others will buy only tire dealers where all locations are owned by the parent company. There are PEs that buy only profitable companies, while other PEs focus on businesses that are losing money and are in financial distress. Most PEs prefer buying a majority stake in a business, while others are content to be a minority investor, allowing the owner to retain a 51%+ ownership stake.
How Can Private Equity Investors Help Tire Dealers?
As we already mentioned, PEs are in the business of growing and improving businesses. PEs can bring capital to boost growth, combine multiple acquisitions to form a larger business and help with the infrastructure needed to support growth. PE investors can also help business owners think about how to address important issues including expansion, how to deal with threats from competitors, negotiate more favorable agreements with suppliers and vendors and other aspects of business operations.
Most importantly, PEs can provide business owners with an exit plan that includes a financial payout. For many business owners, the biggest personal asset they have is the equity in their business. When you are ready to sell, PEs often offer the best option to cash out and realize the rewards of a lifetime of building a business.
Private equity is definitely an option to consider for tire dealers, but a PE investment is not for everyone. You have to know what your objectives are and also be clear about whether or not your business is a fit for private equity. After all, bringing in an equity partner is not for everyone. PE investment in the aftermarket is here to stay and the team at Schwartz Advisors projects that PE activity will pick up and be active starting in the latter part of 2020, and into early 2021 and beyond.