What Makes a Business Attractive to PE Right Now ft Henry Feinberg

[0:00] All right, let's get going. So again, thanks everyone for joining. My name is Nish Sampath. To kick us off — private equity has a bit of a reputation problem. If you ask most founders what comes to mind when they think about PE, you'll hear: they strip companies for parts, they fire your team, they load you up with debt, and they ruin what you built. It's kind of the boogeyman version that doesn't necessarily reflect the reality of what private equity, especially in that lower mid-market space, actually looks like.

[0:30] But almost every founder I talk to is also getting calls from PE, and they're quietly wondering if some of those calls might actually be worth taking. So today we're cutting through the myths. We're talking about how does PE actually operate, what are those PE buyers looking for, and how should owners prepare before they even pick up the phone.

[0:44] Today I've got Henry Fineberg with me, managing partner at 48 North Partners. It's a really unique advisory firm that helps business owners find the right PE partners, whether it's for capital or for exit. Henry sits right in the middle of that transaction every day and is here to bust some of those myths. Henry, thank you so much for joining us. Tell us a bit about 48 North Partners and your unique business model.

[1:11] Yeah, well, first, thank you for having me. Honored to be on here and talk to some folks. And I think the stage that you set is the right one. It's kind of where myself and my partner Chap Newhard got 48 North started — to really help with the process that comes with treading the crazy waters when you're looking at making one of, if not the biggest, decision in a lot of folks' lives, who have spent years — maybe generations — building an incredible business, regardless of the industry.

[1:42] And so 48 North Partners was really started with the idea of how do we help break through some of that noise and make sure that folks are in the right rooms, meeting the right people, to bring them the opportunity that fits with really how they think of the next step for their business. And being something that is oftentimes a very, very important part of people's lives and identity, it's important to find the right shepherd for that business going forward.

[2:15] And so where we have established our firm is really on the buy side — meaning all of our fees are paid for by the folks buying your business or anybody's business — whether that be full buyouts, folks looking to go sit on a beach, or folks who are looking to work through some succession planning, or they have kids in the business, or even just some growth capital and help to add some fuel to the fire. We're able to offer not only introductions but some insight from the transactions that we've done across a multitude of different industries and different scales — to make sure that you are in that correct room for the specific situation that you're looking for. Because none of them are ever the same. And it's important to find the right team that you believe you can really go grow your business with, or achieve what you're setting out to do with what you've already built.

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Chapter 1: Busting the PE Boogeyman Myth

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[3:12] I love it. And frankly, before you and I met, I had never heard of that specific business model. I thought it was incredibly creative and it's why you and I kind of started connecting and becoming friends. Fantastic work, guys. Listen, let's start with the biggest myth out there — PE is out to gut the company. What's the reality of what these firms are actually doing, especially in that lower mid-market space, that $3 million to $50–100 million range, when they actually go and buy a founder business?

[3:44] Yeah. I mean, I think the common misconception — the boogeyman that is private equity — is that the business is going to be bought and stripped for parts, people are getting fired, and the DNA that has created a business that has the reputation it does in their given community is going to be done away with. And the reality of the situation is the investment that is made in the lower mid-market is really with the idea of: how do we act as partners with these business owners to help them grow their business? And it is the very nature of the investment itself — that is how everybody is going to win at the end of the day. The idea is to invest in companies that are on strong growth trajectories with a horizon that promises continued growth.

[5:07] But as many founders and owners know, achieving that growth takes time, takes effort, and can be drawn out in a way that if you've already done it for 40 years, maybe you don't want to dive into this next big stage of growth — despite the fact that you know it's there for the taking. And so when you find the right partner, it's somebody that is not coming in and acting as a parachute boss necessarily, but instead acting as a sounding board for different ideas, a capital source where you need an influx of cash, a full vault of resources — whether that be marketing, financials, or even just scheduling for businesses dealing with a lot of moving pieces as most are.

[5:58] That's really where the partner is going to come in and help that business to grow — and they want to grow it by driving revenue and sales rather than cutting expenses. Because as many founders and owners know, the true DNA and reason why most businesses have reached the level of success they're at is because of the people. Operating a business in a given community takes a lot more than just money or experience in growing businesses. It takes that reputation in the community. And a lot of that comes from not just the owner's face recognition in that community, but their team as well — the level of reputation they've achieved through years, sometimes generations, of good work, taking care of their customers, and taking care of their people.

[6:46] And so any investor worth their salt is coming in with the exact same idea — but maybe just an ability to help achieve that growth that might be possible for the individual in 20 years, and hopefully in five.

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Chapter 2: The State of the PE Market Today

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[7:07] Yeah, I love that. Because at Switch, we're working with companies in that mid-market space, helping them prep for exit. And most of the time, these founders are exhausted. They're exhausted trying to do everything on their own — having to scrape together capital, having to know all parts of the business. Being able to bring in some of that external expertise, some of that external capital, some of that fuel for the fire that takes the load off their own back — or frankly just removes it completely — I think that's what they're looking for. That's what they need help with.

[7:42] Yeah. And it takes some risk off the table too. Every owner of a business knows tomorrow and what lies around the corner is largely unknown. Whether you've been generations in business or just got started — a lot of it is, and maybe I'd say the fun of it is, that entrepreneurial spirit that comes with the unknown. And so it's having a partner that helps you diversify some of that risk. Let's get some chips off the table and some cash for you, for your family, for what you already built. But if you don't want to step away, there's a whole vault of opportunities and examples where you can retain some of that ownership, play a large part in that growth, and recognize some financial upside right in line with your private equity or investment group partners in a handful of years down the road. So it can look a lot of different ways.

[8:39] I think that's fantastic. So let's step back and talk about the state of the PE market in general today. Where is capital flowing? Are there specific industries? Are there areas that have cooled off? What do multiples look like?

[8:57] Yeah. I mean, I'd love it if there was a reality where you could paint a broad brush stroke and say every business of a certain scale is going to get this multiple. It would frankly make my life dealing with deals of different sizes and owners and dynamics a little simpler. But the short answer is it's not true. And it depends on some of the tangible aspects — like where the business is located, what kind of team the business is operating with, what kind of scale they've achieved in terms of financials but also reputation. But then it's also some of the intangible stuff that can drive those multiples or value in a business — in terms of the owner or the leadership team, their desired role going forward, or how does this business or opportunity fit specifically with the group looking to invest in it.

[9:50] And to take a step back and answer your first question of how the whole landscape looks right now — obviously it's going to depend on the industry. But we've seen over the last handful of years, for a lot of different macroeconomic reasons, that there's a lot of capital that's been sitting somewhat on the sidelines. And folks are looking to deploy capital for the right businesses and right partners. So it's a very, very interesting time for business owners who are thinking about: hey, what does the next five years look like for me? Do I want to grow the business? Could I see opportunities to do it but don't really know how to take that step? Or how do I achieve the mid-level management needed to get from $10 to $20 million in revenue? That dry powder waiting to be deployed — it's a very advantageous time to start having those conversations.

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Chapter 3: Tech vs. Industrials — Where PE Is Looking

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[11:04] I think that makes a lot of sense. But around that middle management piece — I think that's really important for founders to chat about. But for the moment, let's continue to expand because I think at least in our experience, with AI and the boom happening — do you see people shying away from tech and more towards industrials and more physical goods?

[11:29] Yeah. I mean, I think there is a big question mark around the tech space right now — pure SaaS-focused software businesses in the sense that AI is obviously very powerful. It has created a lot of question marks about different businesses and different lines — ones that may be more AI-resistant going forward and ones that could instead benefit at a very high level from some AI implementation. And so I think in the last year or so, folks solely focused on the software side of things have a lot of question marks and there's a lot of unknown.

[12:20] Now, is there continued focus and investment on some of these other — whether you call it industrial spaces, or even professional services, or a whole host of other industries? Absolutely. Because I think every owner and founder can look at their business and take a step back and say there are areas in what we do day-to-day that we can be more efficient. That doesn't mean it's not scary or daunting to start implementing some of those changes. And so that's where there's a lot of value add that can come from a partner who's not only going to be offering capital and diversification of risk and help you grow the business — but hey, we've had experience implementing some of these changes. We're going to do it in a way that the team using it in the day-to-day is going to be okay with — because if we start dropping in all these crazy tech changes, they're not going to enjoy what's happened, to put it lightly.

[13:38] And I think that comes back to the concept of fuel on the fire. We think fuel is cash — sure. But expertise is a huge part of that. We can grow if we inject some new tools, new technologies, maybe some new people into the mix.

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Chapter 4: The Buyer Universe — Who's Right for You?

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[13:55] Now, switching gears a little bit — the buyer universe is pretty crowded. There's independent sponsors, search funds, family offices, traditional PE. How should an owner think about who's right for them?

[14:14] Yeah. I think it's a common hurdle that folks look at when they start having these thoughts — which one's the right fit for me? Which one is not going to have the boogeyman feel? Which one is actually going to be the right shepherd for the business going forward? Whether that means I've got kids and I want to make sure they're still taken care of and have the opportunity to play a meaningful role going forward, or — as most founders and owners feel — my team is my family, and I want to make sure they're all taken care of.

[14:49] And so I think that's where a lot of these different pieces come into play around: when is the right time to have that conversation? Who are the right people to talk to? And when do I know it's the right time to really dive into one of these different areas of focus — whether that be an independent sponsor or a PE firm or a VC firm or what have you?

[15:12] And what I would say — to shamelessly plug us a little bit — is that's where we can help a lot. It's why we started the business candidly: to offer a resource that is completely free from the first conversation we have to the day that you hopefully reach an agreement with the group and have a very lucrative moment in selling your business, rolling some equity, being a partner, or receiving some of that growth capital.

[15:44] The shorter answer is: it depends on what they're looking for. There's not a one-size-fits-all, and there's not a cookie-cutter fit even within just the private equity realm. The buyer universe can seem crowded from the outside looking in. But when you talk to different groups as much as we do, you understand that there are slight differences and nuances and angles that each group is pursuing to differentiate themselves from the other competitors also looking to buy businesses in the same field. And so what you're looking for as an owner is going to fit very nicely with one of, if not many of, these groups. But how do you know which one? You've got to start having some of these early conversations. And doing it with a group like ours — and there are a few others that are great — is a great way to do it, because you're not locking yourself up on any timeline. You're not signing any dotted line. You're not agreeing to give any dollars to anybody. It's just a chance to start gathering some knowledge.

[16:56] Yeah. I mean, I think you nailed it. Starting early — like we always say — before you start getting those letters of intent and you're trying to look at it 12 to 36 months out — figure out what you actually want out of this. What's my vision for this organization 3 years down the road? Who's going to continue to maintain that on our behalf? What do I want out of that equation? And having a trusted partner like yourself to have those conversations with and make sure they can actually sus that out — that's really going to help them. But again, earlier the better. 12 to 36 months is the optimal window.

[17:36] Yeah. And working with folks like you, Nish — not to plug you as well — it's finding folks who are able to take a little bit more of an objective look at the business and say: hey, some of these comments or pieces of advice are in no way saying you don't have an incredible business. But if you want to go down the path to selling, or partnering, or receiving capital, or whatever it looks like — there are certain things that are more desirable versus less. There are ways to get your financials in order that will make it so you can get the highest and best outcome possible for you and your family. And all those things take time to implement.

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Chapter 5: What Gets PE Excited

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[18:15] Let's chat about — when a PE firm does get excited about a business, what's consistently showing up in that business that's getting them excited?

[18:27] Yeah, great question. I think it's easy to answer kind of industry-wide when you think about things from an investment perspective. When folks are putting dollars to work — especially at the scale that is deemed fair for a lot of businesses in that range we talked about at the beginning — it's a high dollar amount. And so recurring revenue, consistent and predictable future growth that can be positively affected with some influence and support from an investment group — those are consistently the things that are earning the highest multiples or valuation. And that can look a lot of different ways across a lot of different businesses.

[19:12] But avoiding things like super heavy customer concentration is one way to diversify and get away from that. You can think about any aspect of the business that if one thing was to change, there'd be a drastic and negative impact — and that one thing changing is largely out of the control of the owner, the team, the future partners and investors. Those are the things that are consistently looked at more negatively from an investment perspective.

[19:48] Yeah, the single breaking point is huge. Whether it's customers, people within the business — like the founder dependence is a huge one we see, where they're just so deeply ingrained that the business becomes that single person. You can't strip them away. Or even that single salesperson where the entire book and all the relationships are owned by that one person — and if they were to leave, everything disappears.

[20:14] Yeah. It's that key man risk. And when you start talking investment and this level of equity or capital being put to work, all those things — you know you're going to keep crushing it and running the business — but to get the approval of a host of folks that sign the dotted line to actually put those dollars to work — you said it exactly right. It's that one turning point moment, one thing that could break the camel's back, that creates concern.

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Chapter 6: Red Flags That Kill Deals

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[20:51] You know, just expanding on that — what are the other red flags that you see? You've gone through a lot of diligence over the years. What comes out? What are some of those things that the seller should have prepped for beforehand?

[21:10] Yeah. I mean, I think the common one that we see all the time from a prep perspective — and something you can really have in your control — is getting your financials and the details around your business in order. On top of that, it's not shielding anything and being upfront with every hurdle or crux that you might have come across as an owner, whether that be legal issues, personal issues, or things of that nature. All those things will come out eventually. So getting in front of them is a great way to show you are an upfront, transparent, and on-the-same-side partner that they can go build something really special with.

[21:47] But the earliest one to really get in place — as soon as you can, both from an operating the business perspective and from eventually if you choose to selling the business or partnering — is getting those financials in a place that is clear, concise, and detailed in the sense that your personal expenses as owners might be running through or are out. The idea is: an investor group is going to look at a business and say, "What would this business have been generating over the last 12, 18, 24, 36 months had we owned it? What do we believe it's going to continue to generate when we do own it or partner in ownership with this individual or group when we can add some fuel to the fire?"

[22:42] And so the cleaner that you can have those financials — not only does it show you're on top of your stuff — but the quicker you can get to a high-level valuation and some guidance on how does somebody in the market look at valuing your business.

[22:59] Yeah. And frankly, without the clean financials, you're going to struggle with growing your business generally. You can't make informed business decisions. And your buyer's going to notice that — you know, you're running on gut, there's probably one person who's just thinking about it, maybe renting their boat through the corporation, whatever that looks like. And it makes sense — when you own the business, you get to.

[23:20] Yeah. And the challenge is those buyers want to be able to say: "Hey, listen, if that person stepped away and I was to replace them — can I do that effectively? Do they have to come along for a 5-year ride in order to help scale this business?" Because a lot of founders we're talking to — they actually just want to walk. They're like, "Listen, I want to help transition that business over a short period of time and then I want to go sit on the beach."

[23:44] Yeah — they've worked their butts off for sure. And that's totally out there. I think there's a common misconception that goes so far as: there is a one-size-fits-all — and it's not the case. This transition period — if somebody wants to go sit on the beach or has kind of reached their end of wanting to be involved — it's absolutely okay. It just creates questions of: hey, do you have anybody in mind that you've been working with that you think might be able to take the helm, or a couple people to fill your shoes?

[24:22] And it goes back to the other things we talked about that can create issues — customer concentration, key man risk. If that key man risk ties with the customer piece — yeah, maybe you're not as involved in the day-to-day, but all the business is really coming through you and the personal relationships you've built — well, then that's going to be something that's hard for an investment group to say, "Great, we're okay with you stepping away in 12 months or 6 months from the date of closing the transaction." So there are all those pieces that tie together that, depending on what you're looking for as an owner and as the direction of your business, can play smaller or larger impacts on the type of deal you're looking at.

[25:14] Yeah, we've seen some pretty significant valuation drops from just pieces of those missing.

[25:19] Yeah. And even that comes down to process work — where we talk about key man, but if everything's stored in somebody's head and it's not even the customer relationships, it's just the how-tos and you can't train anybody, then you can't necessarily scale the business. And what we're trying to do is not just keep the business as is — we want to throw fuel on the fire and see this continue to grow.

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Chapter 7: When Deals Fall Apart

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[25:45] Have you ever seen deals fall apart? What's happened in some of those situations?

[25:54] Absolutely. I think deals can fall apart for a million different reasons. And it's from as far as sometimes the personal doesn't line up to the financials. There is a process that comes with selling your business — no matter how it looks, for capital or bringing in institutional investors — it largely looks pretty similar regardless of the group you're working with.

[26:20] In general, there is an initial period of getting to know one another. Do they pass the airport test? Is this somebody you get along with? Do you see vision and growth for the business in the same way? Do you agree with how their thesis or strategy outlines the ways they think your business can help that growth? Great. Then there becomes a moment of sharing financials, really digging in, getting together in person and continuing that personal relationship development while you dig into the numbers and look under the hood — both from an investor perspective and the business owner looking at the investment group and understanding how they're really looking at growing.

[27:08] And after that period, there is the LOI that gets signed — and this really just puts you in a period of exclusivity. It is not binding, saying you are agreeing to sell your business, but it is a high-level agreement on the terms and opens up a period of exclusivity in which there is a lot of work done to verify everything that has been looked at to date — meaning a quality of earnings report, legal due diligence, looking to see: hey, is the numbers that we think and everybody's on the same page truly what's coming out of the business?

[27:42] And a lot of times — to go back to that financial piece — the quality of earnings report is one of the most consistent reasons that we see deals either falling apart or changing on their surface in terms of: hey, we thought the business was doing X in terms of net income or EBITDA, and when we got this quality of earnings report back, it turns out it's doing half of X. Well, I think everybody would agree that's a very different business than we thought.

[28:24] Right. And sometimes it's a small enough change that it doesn't really move the needle. And sometimes it's a big enough change that there is a question and a conversation that needs to be had — hey, we can no longer look at those terms that we had before because the business is different than what we all thought it was. And that can be a reason for parting of ways, or there can be a restructuring that occurs.

[28:49] But throughout that period, I'd say the quality of earnings and having the right team in place to help you get through that part of the process is super, super important. And as you said before — the earlier you can get your financials in order and understand truly what's going on with your business operationally, financially, and with the team internally — the smoother all of those pieces are going to go, and the more likely you are to have a successful outcome, whatever that looks like for you.

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Chapter 8: When to Walk Away

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[29:21] So on the flip side — have you ever run into a scenario where you told the owner to walk away, where the buyer just didn't show up at the last mile like they said they were going to?

[29:35] Yeah. I mean, legally — well, the answer is yes. When there is a moment that is not the right fit for that owner. And that's where I think we can add a lot of value — there is an ability for us to really see behind the curtain of both groups.

[29:58] And when we are aware — well, I'll say this: very few times has that happened, Nish, because candidly, where we really hang our hat is that we're only putting you in a room that we know is going to check those non-negotiable boxes. Now, if there's not a personal meshing or alignment of vision, that's largely up to the business owner. I'm not going to give advice — and I would never tell my team to give advice — of hey, this isn't the right fit personally for you, because we won't work with people that we don't know and have done deals with. Folks that are above board, mean what they say, honor the terms of the agreements that they put forward. And so the rooms that we're putting you in are ones that check those boxes from a personality standpoint, and you're going to be treated fairly when you step in the room with these groups.

[30:55] Now, like every industry, there are bad actors out there. And for my firm, we choose and work very diligently to not align ourselves with folks that we have had those experiences with. And I've been very fortunate to be able to work with a lot of groups that are not the bad actors or bolster the reputation that folks believe is kind of the bad guy that is private equity.

[31:24] And so for me, candidly, Nish — I've never had to have that conversation where I feel something's going on that's not above board or in the background that you're not aware of. I'm not saying it never happens, but we've been very fortunate to work with the partners and investment groups that we've aligned with — they're not engaging in what we'd call bad practices like that.

[32:05] Yeah, Henry, this has been amazing. Thank you so much. I know we're at time. It's definitely the kind of information that helps business owners — they need this to make those informed decisions. Who do they trust? And frankly, who's right to take over their legacy and take that business forward into the future. It's been amazing.

[32:21] Yeah, well, Nish — thank you for having me. Really appreciate you thinking of us. It's been a pleasure working alongside you, getting to know you, and I know that we're going to keep doing special things. But hopefully some of this stuff is helpful for folks out there thinking about the next step.

[32:35] Absolutely. And I think for anyone who wants to connect with Henry and learn more about 48 North Partners, they can find you on LinkedIn or on your website. We'll see you soon. Thanks again.

[32:46] Sounds great. Thanks. Take care.

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