According to the Small Business Administration, retiring baby boomers are expected to sell more than 10 million privately owned businesses by 2029. These founder-led companies often operate under the radar and have loyal customer bases and strong market shares. But too often founders struggle to find the right “homes” for the companies they have spent decades building. Although it may not be instinctive, selling into a growth-equity backed platform in their space can address and alleviate concerns founders have at this crucial moment.
Often the logical entities to sell to are larger companies who want to acquire smaller competitors and that loyal customer base. While appealing in some cases, there may be downsides to this strategy. First and foremost, it can be the “end of the line” for the acquired company. This often means the end of a brand that a founder has poured their life into, and also means the founder won’t be able to participate in potential future growth. Second, it is often routinely not an optimal outcome for loyal employees of the acquired company. They may not be interested, may be asked to relocate, or may not be offered a role at all.
These potential pitfalls we believe reinforce the value proposition of selling into a growth-equity backed platform. These platforms are often smaller, faster growing and more nimble than larger (often legacy) companies. They also often offer employees of the acquired company a bigger role in a broader growth platform, significantly enhancing potential career growth opportunities for employees. And most importantly for founders, they can often retain a stake of their company (rolling it into ownership in the new growth platform), which means they get a “second bite-at-the-apple” when the growth equity firm eventually exits, typically at the three- or five-year mark.
To demonstrate the appeal of this approach, consider the story of Herlitz Inventory Management, which was recently acquired by M33-backed BFC Software.
Herlitz’s founder spent 15 years building out the product suite and was looking for the best fit for his company’s future. Herlitz, which provides inventory management optimization software, was interested in expanding within its market, potentially through a partnership. The possibility of being acquired by a large company was not a preferred route due to a desire to see the brand maintained and employees to be well attended to.
After analyzing its options, Herlitz concluded that growth-equity-backed BFC Software, a comprehensive food-focused warehouse management system, was a natural fit to partner with for the future. With a complimentary range of products, BFC was able to easily integrate Herlitz’s offerings into theirs, creating a company that optimizes warehouse processes from start to finish.
Additionally, Herlitz’s founder, Carl Herlitz, was able to take a leadership role at BFC as EVP of Inventory Management. BFC and Herlitz also had a pre-existing relationship, which helped with the cultural integration of the two companies after the acquisition. That aspect should not be overlooked.
According to the Harvard Business Review, 30 percent of M&A deals fail at some point in the process, most commonly due to a lack of robust cultural integration. It is critical for the acquiring company to ensure they can get everyone on board with the vision for the new company. This includes providing growth opportunities for new employees and finding ways to familiarize new employees with products, business practices, and staff, as BFC did with Herlitz during its acquisition. The goal of these culture integration tactics, which often begin before an acquisition is complete, is to ease the anxieties of the company’s founder and to ensure the future success of the new entity as a cohesive group of employees. By ensuring that cultural integration is carried out correctly, founders of the acquired companies, like Herlitz’s founder, can feel better about their eventual retirement and the future of their business they’ve worked so hard to build.
With such a tremendous opportunity in the market and over 10 million privately owned businesses expected to be sold in the next five years, it’s important for founders who are looking for the next phase for their companies to look at their options and make an educated decision with their employees and business in mind. We believe growth equity-backed acquirers are the perfect acquirers for founders of small businesses who want to see their brand continue and ensure their employees have growth opportunities while maintaining a stake in their business until they retire. For founders looking to give their employees and their brand growth opportunities and see the potential for significant returns post-retirement, growth-backed equity platforms are the preferred sales target for the future of their business.
