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How To Identify A Business Segment To Buy As A Private Equity Advisor
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Have you ever wanted to be a private equity advisor? Well, I can tell you how to start. Once you have met the baseline criteria (have been in the c-suite of a $100M grossing business) you must define the industry segment that you wish to target for acquisition. I have over 20 years of successful senior leadership and entrepreneurial experiences with multiple successes with mergers and acquisitions. Below is a narrative that discusses the things to think about when targeting a business segment for acquisition. This is the first step to becoming a private equity advisor.

I was talking to a group of sports executives about how they could become private equity advisors and potentially bring deals to venture capital firms. In our discussion, I was rather impressed with the money that some of the minor league affiliate teams in baseball, basketball, and hockey could make.

Mickey, the minor-league baseball affiliate spoke first, "So are you saying that as the owner of a minor league baseball team, I can only bring a minor league baseball team to the table?"

"No, Mickey," I answered. "But as your background is baseball, I would imagine that you would want to look at businesses that had something to do with that." I thought a moment before going on. “At first you want to be as specific as possible. For example, you may want to target high-end sports apparel and uniform makers that sell to primarily minor league baseball teams and have an annual business of between 35 million and 200 million dollars, rather than just sports t-shirts manufacturers."

Mickey nodded in understanding.

"Do you think you could develop a list of about 50 companies that met those requirements in say six months time?" I asked. "Possibly," he said slowly.

"You might have an opportunity to broaden your scope over time," I continued. "Remember your are trying to identify your industry segment to develop a deal thesis. You want to be able to put it into written form, so that I can present it to one of the private equity companies I represent. Then they will be able to help you narrow your choices."

Larry, the minor league basketball team owner, broke the silence next, "So if I could identify 50 sports merchandise companies that make sneakers, I might be able to develop a presentable thesis, right?"

"You have the right idea, Larry," I answered. "You definitely want to focus on an industry that you are experienced in. At least 10 years of experience is a good starting point, and it should be fairly recent, like the last one to five years. If you ran a plastics company 20 years ago, that would not be a good choice."

Larry was making written notes on an index card. "I know a guy that owns a sports memorabilia company, ProAllStars…" Larry's face reddened as if he had given away the secret to eternal life. "They seem to have good underlying trends and growth," he added quickly.

"Exactly the kind of business you want to focus on," I interjected.

"You want to be able to identify changes and underlying trends in the segment that will drive growth. For example, the sports merchandising company that you mentioned, having multiple professional sports that it services, with good options for men and the growing segment of women's apparel and jewelry. That may be the compelling issue that private equity money is going to favor."

Larry and Mickey nodded, but Wayne, the minor league hockey team owner spoke, "Would more special characteristics be better?" he asked.

"Yes, I said. "Knowing the size, geography, and capabilities of the target company would be helpful."

They all nodded in unison.

"Get your list of companies together with the reasons that you can think of as to why they are relevant to your strategy. I can help you identify more reasons why a PE company would be interested in acquiring them if you need the help."

Mickey was rubbing his hands together.

"Don't get too aggressive on company size," I said. "Most PE firms will be comfortable with a target that is 75% of the largest company that you have run. And keep your revenue range pretty narrow, no more than four times the small end."

I stood erect and looked around the table assessing them for understanding.

"So," I said. "If you want to become a private equity advisor, you have to first identify a segment. Try to be specific, at least at first, so you can develop your deal thesis. Focus on an industry where you have at least 10 years of experience, within the last one to five years. Focus on industries with good trends, and try to identify changes that will drive growth going forward. Add in as many characteristics as you can, and then start listing your potential targets and compelling reasons to buy. "

Larry read from his index card, "No larger than 75% of my largest profit-and-loss sheet and with a narrow revenue range, large end no more than four times the small end."

"Yes," I said. "If you get your list together, then I can review a-private-equity-initial-contact-checklist with you."

"And that will close the deal?" Wayne asked.

"No," I answered, "In private-equity-negotiation-the-start-of-a-conversation is just the first contact with a company's primary decision maker. You are nowhere near a deal yet. It really takes about one to two years to pull off one of these things, so let's not get ahead of ourselves. First come up with your deal thesis that identifies a growing industry segment. We will discuss the other stuff after this, okay.”

Mickey, Wayne, and Larry all nodded.

"Good. You get started. I will talk with you in a week to keep you directed and give guidance as necessary."

"Sounds good'" said Wayne. Mickey and Larry nodded.

"I will talk to you in a week." And our conversation was over.

Thanks for reading.

Street Talk

Want to sell your business? Contact me. J.

  about 1 decade ago
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