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How does a Private Equity structure their deals?
- They start with a Thesis. This is a sector focused investment strategy. For instance, buying Infusion Pharmacies because they are not adversely effected by PMBs and they are in high demand based on the prevalence of Home Based care.
- Find a Platform Company. A company with which they will buy other companies, which are called “Add-ons”. This becomes their Portfolio Company that they will attempt to sell later for a Return on Invested Capital (ROIC). If your company is smaller it will most likely be an “add-on.”
- If they believe the Owner/Operator is vital to the success of the business they will offer him an Employment Position and Rollover Equity. We will negotiate all aspects of this, including salary and how the Equity is treated relative to the other shareholders. Ideally we want the seller’s equity to be Pari Passu (or equal) to the other equity.
- All Private Equity has Limited Partners (LPs) & General Partners (GPs). Simply put, the LPs put up the capital and the GPs run the Fund and Operations.
- When valuing your business, the GPs negotiate based on Multiple of EBITDA. Ultimately they will want to improve the business and greatly increase the EBITDA and currently drive up the Exit Multiple. For instance, if a hospice is purchased as an Add-on at 5X adjusted EBITDA the PE firm will want to see the Portfolio Company EBITDA increase by a factor of 5 to 10 times. At this point, the Exit Multiple may also increase give the larger size of the company.
- It is vital that a detailed LOI be negotiated before initiating a sale to a Private Equity Group. They only buy a small percentage of the deals they review. This is due to a very onerous Due Diligence process and Purchase Agreement negotiation.