Market developments: increase in acquisitions of SMEs by private equity

The number of business acquisitions by private equity has risen sharply in the past years. For one thing, there is more capital available, for another, entrepreneurs are increasingly open to selling to private equity firms. Het Financieel Dagblad, the leading Dutch business newspaper, recently clarified this increase in several articles. This article primarily focuses on facts and figures based on closed transactions with a deal value of between 1 and 100 million euro, advised by Marktlink since 2020.

Facts and figures from our database indicate that a private equity firm was the buyer in 70% of business acquisitions in 2022. In 2020, this percentage was just 53%. Nowadays, one or more investors are among the 6 to 10 selected potential buyers in all but a few M&A processes. Investors can be either private equity firms or businesses backed by a private equity investor.

Professionalising with a capital injection

The average multiple paid by private equity buyers increased considerably in the past two years, by 12% in 2021 and 30% in 2022, compared to 2020. For strategic buyers, this percentage fell by 14% in two years. These figures confirm the changing landscape of the investment market with respect to business acquisitions, not just in the Netherlands, but throughout Europe.

Our database reflects the national trend of private equity targeting the wholesale, manufacturing and production, IT and software, facilities management and e-commerce industries in particular. We also sold many business service providers to investors. A common feature of these industries is, that smaller companies can use the capital injection to professionalise, while maintaining their name and identity – as a result, little will change in actual practice.

Cashing out equity capital

These advantages rapidly boosted the image of private equity. Entrepreneurs no longer perceive investors as sharks preying on their businesses for their own gain only. The figures corroborate that, investors are often prepared to pay more than strategic buyers. On top of that, a sale to a private equity firm by means of a so-called pre-exit offers business owners the opportunity to take a step back, while cashing out part of their equity capital, and yet be part of the growth of their companies.

International private equity network

Expansion of services, products or coverage area is not the only way to grow. International growth opportunities are increasingly presenting themselves. Thanks to our local presence in several European countries and our Geneva Capital Group membership, Marktlink has access to leading private equity firms worldwide. In just two years, interest from abroad spiked by 49%. Moreover, the number of meetings with potential buyers more than doubled by 114%, the same goes for the number of offers.

Entrepreneurs among entrepreneurs

The fact that private equity is targeting SMEs more and more is largely due to return opportunities in the SME segment. With valuations of four to ten times EBITDA (earnings before interest, taxes, depreciations and amortisations), returns of 10 to 20% are achievable. This percentage can be increased by including bank financing and above all by growth. The market of large enterprises is saturated; valuations are high, or companies have changed investors several times. SMEs still offer a great deal of opportunity to expand the business together with the entrepreneur. We often find that entrepreneurs plan to invest in private equity themselves after the sale of their company. Capital invested in private equity yields so much more than the traditional financial retirement model. For sell-side entrepreneurs, joining an investor often means that their businesses stay future-proof, as they benefit from the advantages of private equity. On a personal level, it often gives the entrepreneur lots of fresh energy to take on new challenges.

More propositions

For years, research by Marktlink has shown that approximately 70% of entrepreneurs consider selling their companies within ten years. For older entrepreneurs in particular, the lack of a successor lies at the root of a sale to private equity, whereas younger entrepreneurs actively enter the M&A market. They remain with a company for an average of five to ten years, to start up something new after selling. The family business sentiment plays no significant role for this group, who anticipate current trends and developments much faster. In practice, it is these young businesses that attract the attention of private equity firms, precisely because these entrepreneurs do not want to step back yet and are eager to enter the next phase with a growth partner. The opportunity for an entrepreneur to cash out part of the value of a company is often seen as an added benefit.

Questions about private equity?

The range of investors is at least as diverse as the reasons to sell a business. At all times, your wishes are the starting point in the search for a suitable partner for you and your company. A personal fit, the outlined vision for the future and mutual trust as a natural consequence are vital ingredients. Are you toying with the idea of a sale or do you have growth ambitions, at home or abroad? Do not hesitate to contact one of our consultants. With commitment and passion, our M&A specialists will guide you towards the deal of a lifetime.