Acquiring underperforming businesses
I'm wondering if anyone has insight into the market and opportunity for acquiring underperforming businesses. So not necessarily distressed or turnaround situations but good businesses that may have some hair on them (lack of growth, customer concentration, margins below industry average, etc...). So fixable companies in solid markets that will require more operational involvement. Given the fierce competition for "good deals" in the LMM this seems like an underserved niche and a real opportunity to acquire undervalued companies and not pay premium multiples in what has become an overcrowded LMM PE landscape. The plan would be to do this as an independent sponsor at first and go from there. Are there PE firms or family offices that would back these types of deals if the valuation or deal structure was favorable? Is my assumption about that these types of companies represent an underserved segment accurate? Look forward to hearing people's opinions on the topic.
Go for it brother. Then at least there will be one person that would buy my clients
There are plenty of firms that do this at scale in the UMM/MM like Platinum, KPS, One Rock, Monomoy, etc. and a handful that play more down-market. Unless you’re going really small like $5mm ebitda there will still be institutional competition for those types of assets.
Generally speaking for PE (and anything to do with business buying IMO), past performance is fairly indicative of future results which is probably why not a lot of people do this. It's essentially just small scale distressed/turnaround investing which is a bit more risky than larger scale distressed/turnaround from conversations I've had with guys who both operate in it and work in RX. With a huge company it may be 1 or 2 divisions really shitting the bed that you can sell off/restructure to focus around the real diamonds in the rough.
For a smaller company if it's heavily underperforming in a lot of cases the whole thing is kind of a bag of shit and the founder/guy who's running it is either very unlucky or just straight bad at his job. You're basically having to restructure/change the entire company which requires you know how to identify everything that was being done incorrectly, what correct actually looks, and how to move from point A to B despite the entire business not being built/operated to do just that. Since it's a small biz/you have a more limited budget so you're not getting to bring in a bunch of expert turnaround operators, you need to know how to do it yourself. The guys I know who do this with a vertical focus - DTC consumer brands, software companies, local/regional field services, etc. - all got into it after spending 10yrs+ operating or investing in "good" businesses in the same sector.
Wouldn't necessarily say this market is "underserved" - just that there are genuinely very few targets in this size range that are distressed for any other reason than they're shit companies that nobody should realistically want to own. You're going to kiss a lot of frogs trying to find your prince, and the market is further narrowed when you're focusing on a specific vertical(s) for the reasons above so you'll inevitably run into the 1 or 2 guys in your space who do this and have been doing it for a lot longer whenever you do happen to find a good prospect. It's a lot tougher than just finding a decent company that's got growth, throwing in a little leverage, and letting it do its thing. That said, the guys who make it work make good money as with most things in this industry.
This is great feedback - thanks. The move would be to make majority acquisitions in business doing between $2M and $5M in EBITDA. And then have heavy operational involvement to fix whatever is ailing the company. And in instances where management needs to be replaced, do so. I used to work on the sell side so I saw a lot of these types of businesses. Profitable companies in good industries. They have founders that don’t know how to sell or are over spending in certain areas. As long as the industry is solid, a lot of these businesses are fixable, and typically passed over by most private equity firms.
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