Growing and stagnant businesses can get a boost from equity capital

Jan. 1, 2020
More aftermarket businesses are being financed through private equity capital than ever.
Small jobbers around the country are facing the looming question of what is going to happen to their business. Part of a good business plan is an exit strategy, and selling businesses to an equity capital firm is one option.

Equity capital also is a good option for growing a business as it is a process in which money is invested in the company. But in either case, equity capital is not to be taken lightly and requires a long, hard look into the business' finances and goals, explains Dan Smith, president of Capstone Financial Group, an investment banking firm based in Hilton Head, S.C.

Smith says the growing number of consumers, their dollars spent and the number of vehicles on the road are leading more firms to invest in the aftermarket.

"(This is happening) just because the demographics are perfect," he says. "It doesn't mean the company is perfect, but it does mean the demographics are perfect."

Of the more than 2,000 private equity firms in the United States, most raise their money from banks, insurance companies, endowment funds and pension plans, such as the California Public Employee Retirement System. Billions of dollars are raised from these endowments and institutions and generally are invested in private companies, though some now are going into public companies. These do initial public offerings and are traded on stock exchanges.

"It's a big factor. It is growing every month. It's just a huge phenomenon. I just can't begin to describe the kinds of transactions we have going on now with private equity money. It is just everywhere," Smith says. "We have new groups approach us, just so many every month looking to invest their way into the automotive aftermarket."

Smith says businesses that use equity capital as a financial option can become more efficient. For example, if a business is able to secure equity capital, the firm will force the business to be efficient. In another light, if a private equity firm now owns an aftermarket company that becomes more efficient, that will force other businesses to become more efficient.

"You're getting a new cadre of management talent, more sophisticated management," Smith says. "We see a lot better controls and procedures than we did seven, 10 years ago. It is just creating a more valuable and more succinct business model for these people."

Equity capital also is allowing people to get into China, both in building there and in selling there.

So is it for you?

While equity capital isn't for everyone, it is geared toward many.

"(It's good for) those kinds of businesses where the owner is looking to sell all or part of the company," Smith states. "And he may have different reasons to do that. He may be ready to retire, he may be ready to take some chips off the table or he may be looking to raise money in order to go make other acquisitions."

It also is good for any private company owner looking for capital for a variety of reasons, such as expanding product lines, plants, equipment or real estate.

"It's a very good source of money these days of growing companies, because there's so much of it out there," Smith says. "It's a huge source of money these days for growing companies more so than any time in history."

More and more businesses in the automotive aftermarket are being financed through equity capital. Smith says this is not a bad thing for the aftermarket, but it could be a bad thing for companies that do not keep up with their business before they even can begin exploring equity capital.

"During the last year, I've had the very unpleasant task of telling business owners that their business had no value," Smith recalls. "And that's a hard thing to tell a man that's run a company for 40 years, and all of the sudden after running it for 40 years, he has no salable value. His competitors became efficient, and this was done with money behind them.

"Some people take advantage of the trends, and some have ignored it," he continues. "And in many cases, those who have ignored it, they are left by the wayside."

Staying on course

Smith says those who now think equity capital is a good option for their business should talk with an investment banking firm. He says firms like his speak with business owners about how money could be used, the best sources of money and if equity capital might not be the best option.

"They may have problems that need to be fixed before the equity is brought in. They may need to shed some product lines," he says, adding an investment banker can give advice as to if the business is ready to take this step. Capstone, for example, goes onsite for a year working with a business when it makes the leap to using equity capital.

Smith says while the future of equity capital depends on debt markets, its future probably still will be bright.

"The reality is the amount of money available to them just keeps growing, and it's hard to ascertain anything that would stop that," he states. For example, anytime a teacher is hired in California, that pension grows and so does the equity it is invested in. "There's just going to be more and more money available for different things, and right now private equity is it. I imagine the growth will slow down, but the amounts won't diminish. I just don't know how they could."