Since the initial shock of COVID-19 in early to mid-2020, most businesses have seen remarkable expansion that’s only been slowed by supply chain issues and labor shortages. While those problems persist and inflation continues to be a concern, we’re still seeing growth fueled by low interest rates, pent-up demand, improvements in automation and strong overall economic trends.
In other words, it’s still a fantastic time to own a business. That’s an amazing thing to say coming out of 2021, which set a record in terms of private equity investment — much of which flowed into investing in and growing businesses at the smaller end of the middle market.
The private equity industry had a record 2021 in terms of investing, and a report by Bain & Company estimates that alternative investment firms have roughly $3.3 trillion in funds ready to invest. All of that money needs to find a home, and the big winners are going to be companies that are already thriving.
Another driver for business owners to consider is the possibility of future tax changes — particularly regarding capital gains. Coupled with this frothy seller’s market, it’s a great time to weigh your options.
There are myriad choices available to business owners, whether they’re striving for more growth, seeking to buy out competitors, looking to cash out some equity or wanting to sell. If you have a strong, growing business, it’s likely that someone — a strategic buyer like a competitor, or a financial investor such as a venture capital or private equity firm — has the funding to help achieve your goals.
Because the cost of capital remains low and so much equity is looking for a good home, sellers have outstanding leverage right now. Demand for good businesses is outstripping supply, but this environment won’t exist forever. So if you’re in the driver’s seat now, take your time and find the best solution for you and your business. Here are some basic tips.
- Start by defining your personal and business goals. Do you want to cash out entirely, retain a stake in the business or find growth equity without giving up control? There’s a solution for every situation.
- Find the best option to meet those goals. Some companies only need conventional bank financing, but many benefit from the flexibility, speed and resources of a private investment firm.
- Consider what growth could mean for you and your company. If you maintain a minority or majority stake in the company, you can often benefit from the initial transaction, then get another infusion of capital after an investor meets growth goals. Structure your deal in the most beneficial way you can.
- Choose the right partner. A fair and full price is obviously important, but a great financial partner can bring resources and industry expertise that can deliver transformational growth. It’s also important to find a partner that shares your values and has a good cultural fit. Good people matter, and protecting the legacy of what you built is important.
However you choose to grow your business, 2022 is an outstanding time to do it. I look forward to a busy, productive and thriving year and wish you the same. ●
Grant Marcks is principal, Origination at The Riverside Company
