🔒CT’s aging business owners increasingly turn to private equity buyers

About 40 years after his father established Cromwell manufacturer Northeast Quality Services LLC, Ralph Coppola decided it was time to sell.

Business at the 50-employee company that makes parts like nuts and screws for various industries was running smoothly, doing about $10 million in annual revenue, Coppola said. A desire to leave the manufacturing industry for a new venture drove his decision to sell, he said, but finding the right buyer was important.

“We had options from all the different types of buyers from an individual buyer to a buyer that was a massively huge … hedge fund,” Coppola said.

About six months ago he closed a deal with Kansas-based private equity firm TGP Investments LLC, Coppola said, because the firm’s president understands Connecticut’s manufacturing sector and is looking to invest resources into the company.

As a large number of executives at Connecticut’s privately-held companies — 80% of which are family-owned, according to UConn’s Family Business Program — reach retirement age, an increasing number are selling (or considering selling) their businesses to private equity firms, experts said. It’s a trend that could pick up in the months and year ahead as private equity firms are sitting on a boatload of cash following the pandemic, according to accounting and consulting firm PwC.

Meanwhile, business consulting firms say selling a business to private equity investors can be a good route, but it depends on several factors, including how much control the seller wants to maintain over the company. And the market is hot enough right now where many prospective sellers can be choosy about buyers.

“Trying to figure out if the fit is right is important,” said Will Reepmeyer, a deals partner focusing on M&A at PwC. “It may come down to a situation where you’re not picking your investor based on dollars and cents … but who’s the best investor for my business.”

Reepmeyer said he’s seen a nationwide uptick in private equity firms buying privately-held small to medium-sized businesses.

Last year private equity firms did about 4,100 deals through mid-November, 5% more than all of 2019, according to a PwC deals industry insights report that published in December. The firm predicted the dynamic would continue to ramp up throughout 2021, as some private equity buyers see opportunity in purchasing legacy businesses and optimizing operations to make them more profitable.

“There are a lot of businesses out there that have really strong brands, really strong profiles, management teams and some tailwinds,” Reepmeyer said. “When you put those together, that creates a strong investment case.”

Complementary deals

Brian Kerrigan, a partner and business growth advisor at Hartford regional accounting firm Whittlesey & Hadley P.C., said he’s recently advised clients on multiple deals in which private equity firms bought small Connecticut manufacturers with less than $5 million in annual revenue.

Manufacturers seem to be an attractive target for acquisitive private equity firms, Kerrigan said. Firms can buy a number of manufacturers that make complementary products and consolidate them, which results in a larger and more valuable company.

“It’s definitely happening more now than in the past, and I think some of the reason is because private equity is looking for places to put money,” Kerrigan said. “They’re expanding the pool of investments they want to take on.”

Conversely, owners of privately-held businesses in Connecticut have some strong motivations to sell to private equity, said Robin Bienemann, a program manager at the UConn Family Business Program. Many aging family business owners find the next generation isn’t interested in taking over, and often lack a succession plan.

Private equity firms can offer the money and talent necessary to expand the company and profits, Bienemann said.

“It’s money, it’s people and it’s connections,” Bienemann said. “It’s a good fit for the family business if those things align.”

But Bienemann said it’s important that business owners looking to sell to a private equity firm understand the prospective buyer’s intentions. Some firms invest in companies to maximize value by building them up, while others buy companies to gut them of their assets.

Pros, cons

For business owners considering selling to private equity, pros and cons exist.

One upside is the owner can sell a portion (typically a majority) of the company, while retaining some ownership, said Michael Carter, managing partner at Carter, Morse & Mathias, a regional investment banking and financial advisory firm in Southport.

Some private equity deals even allow the former owner to keep running the company, but now backed with more financial resources and personnel.

However, dealing with private equity firms isn’t always easy, Kerrigan said. The vetting process is often intense, as these investors want to understand the company from the inside out before buying them. Additionally, Carter said, once someone sells their business to private equity, decisions are ultimately that firm’s to make, even if the former owner retains an executive position at the company.

“You’re working for them,” Carter said. “It’s hard for entrepreneurs to sometimes recognize that they’re an employee.”

For Coppola, former owner of Northeast Quality Services, he said the decision to sell to TGP was the right one. In the six months since he sold the company, TGP has invested “a tremendous amount of money” into the company, and appears poised to take the business to a higher level.

“They are there to grow the company, this was not a situation where they were coming in to reduce employees,” Coppola said. “They came in with a lot of capital behind them, so they were able to invest, and they did.”