What To Do When Competing with Private Equity

Private equity firms dominate the acquisition market with vast resources, but small buyers have unique advantages. Here's how you can compete:

• Focus on Smaller Deals: Private equity rarely targets businesses with less than $5M EBITDA, leaving opportunities for individual buyers.

• Build Relationships: 68% of sellers prioritize culture and legacy over price. Use personal connections to stand out.

• Leverage Niche Expertise: Specialization in a specific industry or market can give you an edge over generalist private equity firms.

• Act Fast: Streamline your process to beat private equity’s slower decision-making and approval timelines.

• Use Creative Financing: Options like SBA loans, seller financing, and earnout agreements can make your offer more appealing.

Private equity firms excel in large deals but face limitations like slower decisions and less focus on smaller businesses. By emphasizing relationships, agility, and niche expertise, you can level the playing field.

6 Things Private Equity will do After They Buy Your Business

Private Equity: Strengths and Limitations

Understanding the strengths and challenges of private equity firms can help independent buyers spot opportunities and craft smart strategies to compete.

What Gives Private Equity an Edge

Private equity firms excel in acquisitions thanks to their vast financial resources. They pair deep industry knowledge with standardized processes, allowing them to conduct due diligence quickly and streamline operations after closing deals.

The Challenges Private Equity Faces

Even with their resources, private equity firms have notable constraints that independent buyers can leverage. A key limitation is their focus on larger deals. Most private equity firms target businesses with at least $5-10 million in EBITDA [3], leaving smaller businesses - those under $5 million in EBITDA - outside their scope and open for individual buyers.

Another challenge is their slower decision-making process. Private equity firms often rely on committee approvals, which can delay responses and make them less agile.

Additionally, many business owners value long-term stability and preserving their company’s legacy over short-term profits. Private equity's model of temporary ownership often clashes with these priorities. Independent buyers, who can offer long-term commitments, are better positioned to meet these owners' goals.

Finally, there’s a pricing gap. Large deals often sell for high multiples (9.9x-12.9x EBITDA), while smaller businesses typically sell for much lower multiples (1-5x EBITDA). This creates a cost advantage for individual buyers.

These limitations set the stage for the relationship-driven strategies covered in the next section.

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4 Ways to Win Against Private Equity

Take advantage of private equity's limitations with these focused strategies:

Small buyers can outmaneuver private equity by using these four approaches:

Build Stronger Relationships with Sellers

Creating genuine connections with business owners can open doors that money alone can't. Show real interest in maintaining the company's legacy and values. In fact, 39% of business owners prefer selling to individuals over private equity firms because of relationship factors[1].

Target Undervalued Business Opportunities

Focus on areas private equity often ignores, especially in the $1-5M EBITDA range. Key segments include:

Use Creative Payment Structures

Smart financing can help level the playing field. Here are some options worth considering:

• SBA loans

• Seller financing

• Earnout agreements based on business performance

• Personal equity investments

Act Quickly and Decisively

Move faster than private equity firms, which often face delays from lengthy approval processes. Research from Harvard Business Review shows deals completed within 90 days of the initial offer are 18% more likely to succeed[2]. To stay ahead:

• Secure financing in advance

• Simplify due diligence

• Present straightforward offers

• Communicate clearly and promptly

Key Resources for Business Buyers

To put these strategies into action, you'll need tools and platforms that give you an edge in finding and analyzing deals. Here's a breakdown of resources to help you stay ahead.

Digital Tools for Finding Deals

Online platforms make it easier to spot acquisition opportunities before private equity firms get involved. BizBuySell, for instance, is the largest online marketplace for businesses for sale [6].

Tools for Deal Analysis

The right tools can streamline your evaluation process, helping you act quickly and stay competitive. Here are some affordable options for smaller buyers:

Financial Analysis Tools:

• DealCheck ($24/month): Simplifies property and business valuations [4].

• ProfitCents: Helps with financial forecasting [2].

• ValueAdder ($129): Ideal for small business appraisals [5].

For deeper due diligence, combine these tools with industry research platforms. Statista ($39/month) provides insights on market trends, while IBISWorld offers detailed industry data.

To stay organized during due diligence, tools like Trello or Asana can help you manage tasks and track multiple deals efficiently.

Conclusion: Action Steps

Stand out against private equity by emphasizing strong relationships, targeting specific niches, and executing deals efficiently. Here's how to get started:

Key Steps to Take

• Focus on businesses with EBITDA under $5M, where private equity typically isn't involved.

• Set up clear financing options, like SBA loans or earnout agreements, to streamline the process.

• Develop a 90-day plan aimed at building connections with brokers and business owners.

These strategies leverage your strengths in adaptability and personal connections, helping you gain an edge in this space. Success often depends on preserving the company’s culture and fostering positive relationships with employees.