What Investors Want to See in an MSP

Read time: 3-4 minutes

“Information technology and business are becoming inextricably woven.  I don’t think anybody can talk meaningfully about one without talking about the other.” (Bill Gates)



Something is up in the world of IT services.  Investors are flocking to MSPs like the salmon of Capistrano1.  By my last count there are now approximately two dozen PE-backed MSP platforms in the U.S., and the majority of this deal activity has transpired within the last three or so years.  So, why now has a sector like IT Services, historically less of a focus for private equity investors, stimulated so many transactions?  Well, come along with me on a journey into the history of IT Services to find out where MSPs came from, where they are now, and the specific attributes that have compelled investors to place big bets on the sector.  To start, let’s define what an MSP is.

  • An MSP, or Managed Services Provider, is a business that, on an outsourced basis, provides the following primary services to businesses of all sizes and across industries:
    • Subscription-based management of cloud-based, on-premise & other IT assets;
    • Onsite project-based services (e.g. network design, deployment & repair); and
    • Hardware / software re-selling & implementation

In short, MSPs are delivering the same services your in-house IT guy2 used to offer onsite but now on an outsourced basis, and often remotely.  However, this wasn’t always the case.  In fact, MSPs weren’t even always referred to as MSPs.  The following section will explain how IT services companies have evolved into their current form.


A Brief History of the IT Services Industry

The need for IT support emerged alongside widespread adoption of technology, which in the earliest years simply meant a transition away from legacy communication and productivity methods to the use of computers.  And, with more computers came more opportunity for things to break.  Thus, the IT Services companies of the 80’s that initially focused primarily on hardware re-selling to participate in the rapid growth of business computing inevitably found their way to break/fix services when issues emerged that customers weren’t capable of or inclined to solve on their own.  So, if you’ve ever heard the term “VAR”, or value-added re-seller, this simply referred to an entity that provided hardware and/or software but also the ancillary services to assist with technology implementation, maintenance and repair.  What’s really interesting is that everyone saw the growth of IT Services coming.  In an article in the Washington Post from December of 1981, it was written, “Computer service technicians – the people who install, test and maintain the equipment – will experience the fastest job growth in the industry.” It just took a while for VARs to become MSPs.

The transition from VAR to MSP began in the 90’s, though this was well before any widespread awareness of what managed services was or would become.  This evolution was facilitated, in part, by the emergence of application service providers (ASPs) which allowed for the remote monitoring and management of IT infrastructure.  Initially, remote monitoring and support was focused on servers and networks, though the scope of service ultimately expanded to include mobile device management, managed security, remote firewall administration, security-as-a-service, and managed print services.

In 2005, the modern MSP business model began to take shape, and three individuals – Karl Palachuk, Amy Luby and Erick Simpson – are credited with having pioneered the new recurring revenue model.  In fact, both Paluchuk and Simpson published books on the topic of managed services in 2006, and the MSP model began to take hold with adoption led by enterprise-level clients.  Consequently, savvier VARs migrated their businesses to higher margin, recurring revenue models and tailored service offerings to the needs of the small-and-medium sized business (SMB) community.  Since then, SMBs have responded favorably to the MSP model.  The key drivers for outsourcing IT support in the current environment include a need for:

  • A more proactive and strategic approach to IT given that management of IT resources is non-core to most businesses
  • Maximizing “uptime” to mitigate the risk of disruption from technology malfunction
  • Enhanced risk management / compliance support in light of regulatory requirements that can put an outsized burden on SMBs
  • Cost savings / better forecasting – MSPs often provide for cheaper and more predictable costs (via fixed monthly fees) relative to in-house resources
  • Access to newer technologies to keep pace with change and cybersecurity needs

Today, the global managed services market is estimated to reach over $250 billion by 2022 with an expected growth rate in excess of 10%.


Why Private Equity Funds Like MSPs

PE funds are smitten with MSPs. One need only look at the large and growing volume of transaction activity in the industry to draw this conclusion.  The following graphic and supporting commentary will explain why.

  1. Investing behind technology growth.  Worldwide IT spending is expected to increase 4% annually through 2022, and a great way to invest alongside this growth without taking direct technology risk is to invest in MSPs.  This is because MSPs are not necessarily beholden to any specific technology and can nimbly adapt, and help their clients adapt, to inevitable technology change when it occurs.  Although the backdrop within the MSP industry is technology, the B2B nature of the service offering is comfortable for non-tech investors and will likely be a gateway for firms with less tech experience to get closer to technology plays.
  1. High fragmentation.  The most credible figure I’ve seen is that there are an estimated 3,700 MSPs in the U.S., the vast majority of which are owned / operated by individuals (i.e. rather than by VC or PE funds).  And, in most cases, the basis of competition is largely local or regional with no clear national leader serving SMBs.  Therefore, the sheer number of remaining independent MSPs bodes well for the ability to build regional leadership through a focused acquisition strategy.
  1. Meaningful “white space” remains.  Believe it or not, an estimated 30% or so of SMBs have not yet outsourced the management of their IT needs which suggests strong organic growth potential via new client acquisition.  Further, MSPs continue to offer a compelling value proposition for SMBs to outsource this service, so it’s likely that any slow adopters of the MSP model will ultimately see the light.
  1. Contracted, recurring revenue.  Contracts are customary in the MSP industry which provides good revenue visibility to investors and management teams alike.  Most MSPs will have some mix of recurring managed services revenue, project-based work and re-selling income, but the best MSPs will derive 50% or more of total revenue from MRR.
  1. Tangible benefits of scale.  Investors want to know that there are real benefits to scaling their MSP platforms aside from simply generating more profitability.  With MSPs, growth means the ability to better leverage fixed costs (e.g. Network Operations Centers (NOCs), internal software expense), achieve better pricing & mindshare from key product / software vendors, and access more resources to support customer acquisition which can be expensive when targeting SMBs (e.g. Sales force, digital marketing).
  1. Consolidating, but still early enough to grow via M&A.  To borrow a baseball analogy, we’re likely in the 3rd inning of the MSP industry’s consolidation.  Despite the fact that there are two dozen or so private equity-backed MSP platforms, many markets have little-to-no representation by consolidators.  In other words, secondary or tertiary markets continue to present opportunity for investors.


What a “Good” MSP Looks Like to a Private Equity Investor

With nearly 4,000 MSPs in the U.S. there are going to be good MSPs and not-so-good MSPs.  Fortunately, many MSP owners have readily embraced best practices and KPI benchmarking to maximize the valuation of their business.  Here are some general guidelines for what a private equity investor is going to look for in an MSP.

1. Higher Value-Added Service OfferingThere’s no faster way to determine how commoditized (or not) an MSP’s service offering is than to look at their Gross Profit Margins.  Ideally, you will want to see Gross Profit margins in excess of 30%.  Higher margin services include managed services and cybersecurity whereas less value-added services include things like hardware re-selling and routine project-based work.
2. Strong Recurring Revenue ProfileAcross all industries, companies are doggedly chasing MRR in the interest of maximizing the value of their companies.  MSPs are no exception – in fact, the most tangible benefit of IT services companies evolving from VARs to MSPs has been their ability to capture more recurring revenue.  So, investors are generally going to want to see 40-50% or more of an MSP’s revenue tied to recurring maintenance and monitoring services.
3. High Client RetentionOne of the benefits of the MSP space is a tendency for service providers to retain clients.  I would argue that MSPs doing a satisfactory job or better should not be losing accounts with the exception of those clients that go out of business or get acquired.  Therefore, annual client retention should be in excess of 90% for a good MSP.  Below that level, and MSPs will need to have a pretty good explanation as to why.
4. Longer Contract Terms are BetterFor the same reason that investors like recurring revenue, they also like contracts – increased certainty of future revenue and profits.  Contracts are customary in the MSP space, so suitors will typically want to see a minimum of 1-year contracts (particularly for any larger accounts) to provide more comfort around stability of an MSP’s clients.
5. History of (Successful) AcquisitionsInsofar as M&A growth is a compelling way to rapidly grow the scale of an MSP, an investor will take comfort in the fact that an MSP has lived through at least one acquisition and integration exercise.  Anybody can talk about doing add-on acquisitions, but until you’ve done them, you won’t have the benefit of knowing the pitfalls to watch out for.  Interestingly, investors may even like to see that one or more prior deals didn’t go well such that you won’t make the same mistakes again.
6. Sophisticated Client Acquisition EngineThe double-edged sword of high client retention is that it can be hard to unseat the incumbent service provider of a prospective client.  Therefore, a material portion of organic growth for an MSP will be the acquisition of clients that may have not previously had a relationship with an MSP.  This means that MSPs seeking to ramp up organic growth will have to invest in things like sales personnel, SEO and digital marketing with the attendant processes behind them to produce good outcomes.  An MSP with organic growth of less than 5% may not yet have cracked the code on client acquisition.
7. Client and End Market DiversityMost private equity professionals learn in Investing 101 that customer concentration is bad.  And, as a general rule, investors will pause if any customer accounts for 20% or more of total Revenue.  The beauty of the MSP space is that many MSPs are serving the SMB community which often translates into a very appealing diversity of accounts with limited dependence on any one or more clients.  Similarly, end market exposure can create risks if, say, an MSP is serving a preponderance of clients in a cyclical space that may put a swath of those clients out of business every time a recession hits.  So, investors will want to see a healthy mix of industries served and may hesitate around a focus on clients within sectors like Energy or Construction, for example.
8. History of Adaptation to Technology and Industry Change  One thing is for sure, there will be technological change to which MSPs will have to adapt in the future.  A good present example is the migration to the cloud and the implications that’s having on on-premise maintenance and hardware sales.  So, a good MSP will have proven able to nimbly react to prior periods of technological disruption and help their clients respond accordingly.  After all, the beauty of the MSP industry is that most MSPs are not beholden to any one technology and should be able to successfully adapt during times of change.  A negative sign would be if an MSP holds firm to declining service offerings in spite of clear signs that the world is changing.


In the Land of the MSP, the MSSP is King

Wait, what is that extra “S” doing in there?  If you’re like me, it actually took me a while to admit that I wasn’t quite sure how an MSP differed from an MSSP.  To eliminate any doubt, an MSSP is essentially an MSP that specializes in providing security-as-a-service offerings for their customers.  In other words, MSP + strong cybersecurity capabilities = MSSP, and the acronym stands for Managed Security Service Provider.  While MSPs have been around for nearly 20 years, MSSPs have only recently started to emerge as a more sophisticated variant on the traditional MSP model.  This is important because there will likely be an ongoing and increasing need for companies to embrace best practices in thwarting the cybervillain community lest they be subjected to ransomware or some other crippling attack on their business.  So, the mission critical and esoteric nature of cybersecurity is likely to create a high growth, high margin opportunity for MSSPs for the foreseeable future, and investors will react accordingly by demonstrating strong interest in both acquiring MSSPs and helping their existing MSPs get their extra “S”.  The challenge is going to be when MSPs simply start referring to themselves as MSSPs in an effort to elevate their valuations.  Investors will need to respond in kind by asking more granular questions about service offerings, creating an interesting cat and mouse game while it unfolds.


We hope this sheds some light on why private equity funds like investing in MSPs and what they’re looking for in an MSP.  As always, we’re here to help, so give us a call to start a conversation.


1Yes, I realize that the proper saying would have been, “…swallows of Capistrano,” but I couldn’t help myself3.

 2I must admit that one of the things I miss most about having an in-house IT guy at a prior firm were the colorful stories about niches of daily life not often frequented by members of the non-tech community.  My all-time favorite involved a lengthy diatribe about the alleged dangers of using ammonia to clean out a ferret cage given the potential to lose consciousness – an unfortunate experience endured by our IT guy on more than one occasion.

 3If you somehow don’t know that this is an homage to Dumb and Dumber, then you are likely terribly confused by the reference and should watch the movie immediately to enhance your awareness of an essential film in the canon of American comedy.

4The same article from 1981 also addresses the notion of technology-driven job displacement when one economist is quoted as saying, “What we’ll see is a large displacement of many people as more computers and computerized robots are brought into the workplace.”  If this sentiment sounds familiar, it’s because the idea of AI’s potential to eliminate jobs is presently top of mind for workers across most, if not all, sectors.

About ClearLight Partners

ClearLight is a private equity firm headquartered in Southern California that invests in established, profitable middle-market companies in a range of industry sectors. Investment candidates are typically generating between $4-15 million of EBITDA (or, Operating Profit) and are operating in industries with strong growth prospects. Since inception, ClearLight has raised $900 million in capital across three funds from a single limited partner. The ClearLight team has extensive operating and financial experience and a history of successfully partnering with owners and management teams to drive growth and create value. For more information, visit www.clearlightpartners.com.

Disclaimer: The views and opinions expressed in this blog are solely my own and do not necessarily reflect any ClearLight opinion, position, or policy.

This Too Shall Pass: A Message of Hope to Business Owners from Private Equity

Read time: 3-4 minutes


Hope is the only thing stronger than fear.” (Robert Ludlum)




To date, Coronavirus has claimed over 95,000 lives globally across 210 countries, the Dow Jones has lost approximately 20% of its value from a peak in February1, businesses across all sectors have been forced to furlough and/or lay off employees and, in some cases, close, and most states have ordered residents to remain at home to slow the rate of infection. And, these are not just lifeless facts and statistics – everyone’s lives have been personally upended to some degree by the current outbreak including many with connectivity to a loved one that has been infected.  That’s the bad news. However, this article is not intended to further contribute to the daily assault on our collective consciousness by ever worsening news headlines. To the contrary, this message is one of inspiration to business owners from investors that have persevered through adversity over a 20-year period since our firm’s founding. We are here to say that the lasting consequences of surviving a great trial include resilience, strength and depth of character.  This too shall pass.


Prior U.S. Epidemics and the Results


One way to foster optimism is to better understand what those before you have overcome.  As you might expect, the U.S. has encountered its fair share of disease over the past couple hundred years.  In some cases, diseases occurred in waves and spanned decades.  What may be comforting is observe the conclusion – in every case, medical and/or hygienic innovations resulted in the particular disease’s ultimate containment or outright end.  This is not to diminish the tragedy of each outbreak, rather to simply illuminate where we currently are amidst the Coronavirus saga as compared to other instances of disease.

Prior U.S. Epidemics





1793Yellow Fever from the CaribbeanPhiladelphia

§  5k people died, 17k fled the city

§  Vaccine developed

1832-1866Cholera (3 Waves)New York City

§  2-6 Americans died per day during the outbreak

§  Vaccine developed

1858Scarlet FeverNew England

§ 95% of the people who caught the virus were children

§  Improved hygienic standards ended the epidemic

1906-1907“Typhoid Mary”New York

§  Over 10k people passed away annually

§  Vaccine developed

1918“Spanish Flu”U.S.

§  Estimated 675k Americans died

§  Vaccine developed


§  Over 15k people died

§  Vaccine developed


§  Over 3k people died from Polio during its peak in 1952

§  Vaccine developed

1981-1991Measles OutbreakU.S.

§  Annual death rate fluctuated between 2-10k people

§  Vaccine developed

Source: Healthline.com


The closest historical parallel to what we’re currently experiencing is the influenza pandemic of 1918, often referred to as the “Spanish Flu”2.  In total, approximately one third of the world’s population caught the Spanish Flu which caused a severe respiratory tract infection.  Estimates of the global death toll exceed 50 million with 675,000 casualties in the U.S. alone.  The immediate economic consequences of the outbreak included the shutdown of major U.S. cities such as New York and Philadelphia as much of their population became bedridden.  As we’re experiencing now, businesses were closed, sporting events were cancelled, and private gatherings were prohibited to flatten the curve of transmission. Additional economic consequences included labor shortages, wage increases, deterioration in GDP, and increased strain on the social security system as a safety net. The losses were substantial and not at all to be taken lightly, but we pulled through.  What’s amazing is that despite the Spanish Flu’s ferocity many in the present era had not even heard of it until it became an oft cited analogue to Coronavirus.  It seems we can always count on the passing of time to bring healing.


Prior U.S. Recessions & Economic Crises


The Coronavirus-driven disruption to economic activity in the U.S.  and abroad is now expected to result in negative GDP growth for 2020 in the low- to mid-single digits.  This is on the heels of the longest period of economic expansion in our country’s history, the era following the Great Recession.  At nearly 11 years of GDP growth, many of us find it hard to remember what a recession even feels like, but we’re going to be powerfully reminded.  However, as was the case with prior downturns, we’re going to get through this.  The following chart highlights 12 recessions in the U.S. since the Great Depression.  Note that none of them exceeded 1.5 years in length and a couple posted declines well in excess of what we’re expecting for 2020.  That’s something about which we can be optimistic if history is any predictor of future events.

Prior U.S. Recessions Since the Great Depression
NamePeriod RangeDurationGDP Decline (Peak to Trough)
Great DepressionAugust 1929 – March 19333 years, 7 months-26.7%
Recession of 1937-1938May 1937 – June 19381 year, 1 month-18.2%
Recession of 1945February 1945 – October 19458 months-12.7%
Recession of 1949November 1948 – October 194911 months-1.7%
Recession of 1953July 1953 – May 195410 months-2.6%
Recession of 1958August 1957 – April 19588 months-3.7%
Recession of 1960-1961April 1960 – February 196110 months-1.6%
Recession of 1969 – 1970December 1969 – November 197011 months-0.6%
Recession of 1973 – 1975November 1973 – March 19751 year, 4 months-3.2%
Recession of 1980January 1980 – July 19806 months-2.2%
Recession of 1981 – 1982July 1981 – November 19821 year, 4 months-2.7%
Early 1990’s RecessionJuly 1990 – March 19918 months-0.3%
Great RecessionDecember 2007 – June 20091 year, 6 months-5.1%

 Source: Wikipedia


We’re Living This Alongside You, and We’re Optimistic


As current majority investors in eight U.S. businesses operating in diverse sectors across the economy, we are living these challenges in real time alongside you.  Coronavirus’ effects to our portfolio companies range from slightly positive to materially negative. Challenges across the portfolio have involved managing liquidity, compliance with bank covenants, revenue declines, supply chain disruption, staffing discontinuity and some extremely hard decisions around cost reductions.  However, the current pain we are feeling will subside, and business will resume as normal before long.  One way to view the glass as half full is to remember the sentiment shared by Winston Churchill when he said, “Never waste a good crisis.”  In other words, while times are hard right now, the key is to look for ways to emerge stronger and to grasp new business opportunities in the post-Coronavirus era.


In the Meantime, We Can Help You Solve Problems


If you are a business owner and are going through tough times right now, we would encourage you to reach out to us to share your story.  It’s likely that we have dealt with or are currently wrestling with similar challenges based on having invested in over 20 companies since our inception.  Please use us as a resource if you are looking for anyone to talk to about ways you might address any current business hardships.  Common areas where we see business owners presently needing help include:

Common Coronavirus-Related Business Challenges




1. Managing
Liquidity / Cash

Insofar as cash is king, this is a critical area to which businesses need to be attuned.  Many companies have chosen to draw on their revolving lines of credit to make sure they have sufficient cash on hand to weather the next several months.  There are other tactics that can be employed to preserve cash reserves until the Coronavirus runs its course that we’d be happy to discuss.

2. Compliance with Bank Covenants

Many businesses that were previously comfortably compliant with bank covenants are now having some difficult conversations with their lenders.  Having lived through the Great Recession, we are familiar with the nature of these discussions and can help you navigate those conversations to minimize the disruption to your business.  A proactive and transparent communication strategy with your lenders will allow you to spend more time focusing on restoring stability in the business.

3. Staffing
Continuity / Managing a Remote Workforce

Some businesses, such as those that continue to operate in more consumer facing arenas are experiencing a challenging labor environment due to a workforce that has either contracted Coronavirus or is fearful of doing so and have decided to not work.  This can be a challenging issue to solve for.  The same goes for managing a workforce that has historically come into the office and is now working remotely.  These are issues with which we are currently contending and would be happy to share our perspectives.

4. Revenue Declines

Most sectors are experiencing material revenue declines in the current environment.  While not permanent, it can be painful in the short-term, so it’s important to determine if there are quick pivots that can be made to generate incremental revenue while your traditional lines of businesses are taking a hit.

5. Supply Chain


Whether your supply chain has been significantly disrupted or is simply moving more slowly, the movement of goods is essential to product- oriented businesses.  We’re presently investors in several companies with complex supply chains that have been affected by Coronavirus and have had to respond accordingly.

6.  Cost Reduction

Perhaps the hardest decisions to make are surrounding if, when and where to make cuts to make sure the business remains on stable financial footing.  We’ve had to examine each of our portfolio companies through this lens and would be happy to share some reflections on best practices across the industries in which we are operating.




We hope this review of prior U.S. epidemics and challenging economic periods has given you some hope as to the impermanent nature of what we’re currently experiencing.  Rest assured that there will be good days ahead, and we will be able to share the war stories of surviving Coronavirus.  Please know that we are genuinely here to help anyone wrestling with current business challenges and would be happy to lend our expertise or just a sympathetic ear.  Please call us any time.  In the meantime, please stay safe, healthy and optimistic.



1Also, during Q1 2020, the Dow Jones posted its worst ever first quarter

2The Spanish Flu is referred to as such because it was first reported in Spanish newspapers


About ClearLight Partners

ClearLight is a private equity firm headquartered in Southern California that invests in established, profitable middle-market companies in a range of industry sectors. Investment candidates are typically generating between $4-15 million of EBITDA (or, Operating Profit) and are operating in industries with strong growth prospects.  Since inception, ClearLight has raised $900 million in capital across three funds from a single limited partner. The ClearLight team has extensive operating and financial experience and a history of successfully partnering with owners and management teams to drive growth and create value.  For more information, visit www.clearlightpartners.com.

Disclaimer: The views and opinions expressed in this blog are solely my own and do not necessarily reflect any ClearLight opinion, position, or policy.

Back to School: The Current Opportunity to Invest in Private Preschools

Read time: 3-4 minutes

“The child is both a hope and a promise for mankind.” (Maria Montessori)


The basic definition of a “do well by doing good” industry is one where you can achieve financial success as a result of owning or operating a business that benefits society. Perhaps the most readily acknowledged sector that embodies this concept is education. For decades now, investors have flocked to for-profit educational products and services, and in many cases strong returns have ensued alongside the enrichment of students of all ages.

Presently, a growing recognition of the benefits of early childhood education (ECE) is stimulating entrepreneurship and investment alike in facilities focused on serving children up to around eight years of age. To start, children who attend preschool are more likely to have eventually attended and completed college. Further, preschool educated children are less likely to be arrested, more likely to graduate high school and less likely to struggle with substance abuse as adults. For these reasons and others, the evidence overwhelmingly points to the conclusion that preschool is a good idea, and parents are voting with their dollars. Another powerful driver of the industry’s growth has been the increased labor force participation rate of women which now sits at around 58% of the female population. This trend has elevated both the need for childcare as well as disposable incomes. Today, the U.S. ECE industry is around $28 billion and growing at a rate of 5% annually.

Back to School: The Current Opportunity to Invest in Private Preschools

The Different Types of Private Preschools

In this context, preschool generally refers to childcare centers with an educational focus. Preschools are typically more expensive than traditional daycare and charge tuition that is paid directly by families (i.e. not subsidized). When referring to the different types of preschools, more often than not, you’ll identify them by their pedagogy. If you weren’t previously familiar with the term pedagogy, it stems from Greek word paidagōgia which essentially means “to lead a child”, and the dictionary1 defines pedagogy as follows:

  • Pedagogy (pe-dә-gō-jē): The art or science of teaching; education, instructional methods.

The preeminent pedagogies include Montessori, Reggio Emilia, Waldorf and other / unaffiliated. In terms of the number of schools, Montessori has emerged as the leading branded pedagogy by a fairly wide margin. The following section provides a brief history of how Montessori schools came about followed by a high-level comparison to Reggio Emilia and Waldorf in the accompanying chart.

Back to School: The Current Opportunity to Invest in Private Preschools The Montessori educational philosophy was developed by Dr. Maria Montessori, an Italian physician and educator. The first Montessori center was opened in 1907 in an apartment building in Rome and enrolled 50 or so children of low-income working parents between the ages of two and seven. Through observation, Dr. Montessori took note of incidence of deep concentration, repetition of activity and a sensitivity to the order of the environment. It was in this first classroom that Dr. Montessori discovered that when given autonomous choice of activity, the children demonstrated more interest in practical activities and educational materials than in the toys provided for them. She concluded that a self-directed environment would allow the students to develop better self-sufficiency and reach higher levels of understanding. Indeed, four- and five-year olds educated through her methods quickly gained a proficiency in writing and reading far beyond what was expected for their age. These early observations led to the formalization and implementation of practices that became the cornerstones of the Montessori pedagogy. By 1911, the first Montessori schools were opened in the U.S., and by 1916 there were more than 100 schools in operation. The Montessori method later experienced some setbacks in the 1920’s based on criticism from William Heard Kilpatrick, a highly regarded educational figure, with nearly every school shuttering as a result. However, the Montessori pedagogy experienced a resurgence in the 1950’s, and today there approximately 5,000 Montessori schools operating in the U.S.

Common Preschool Pedagogies

The Thesis for Investing in Private Preschools

When strong industry growth, fragmentation and elevated profit margins collide, it tends to create a fertile environment for private equity investing activity. The following graphic and supporting commentary will provide some more color on why private preschools present a compelling investment thesis.

Back to School: The Current Opportunity to Invest in Private Preschools

  1. Compelling reason for existence. As one of the classic “do well by doing good sectors”, early childhood education benefits from both strong social and commercial tailwinds. Further, numerous studies point to lasting benefits of preschool that extend into adulthood. Early childhood education is just one of those sectors that’s hard to argue about – it seems to only offer positives.
  2. Large & highly fragmented industry with strong growth. As mentioned previously, the U.S. early childhood education industry is around $28 billion and growing around 5% annually. The industry is comprised of over 20,000 preschools with the largest direct competitor having an approximate 2% market share. So, given the fairly extreme fragmentation without the presence of nationally dominant competition, there exists an exciting opportunity to build strong local / regional / superregional preschool footprints.
  3. Private pay model. The variety of preschools contemplated here are private pay models that do not rely on government subsidy. This means that tuition is paid directly by families, and preschool operators will thus not be exposed to any political forces that could adversely affect revenue generated through government programs. Think of it this way, as an investor or owner of a private preschool, it would make for a less stressful existence not having to worry about uncertainties created during election years, and your school’s valuation will be better than one that has exposure to subsidies.
  4. Attractive unit economics. Generally speaking, a well-managed mature school can generate $2-3MM of annual revenue with 20-30% EBITDA margins. If you assume a build-out cost of $500k-1MM, then there is good rationale to grow via a greenfield, or de novo, strategy.
  5. Franchising potential. If you investigate some of the larger private preschool operators in the U.S., you will come to find that many of them have sold franchises to independent business owners. Franchising can be an excellent way to rapidly scale a school’s footprint by allowing entrepreneurs to invest the capital to own and operate their own schools. In our case, we’ve invested extensively in franchising, so this dynamic creates a merging of two arenas on which we are presently focused – private preschools and franchisors.

What Investors Want to See in a Private Preschool

With over 20,000 preschools across the U.S. there’s a wide spectrum of operating models and resulting performance. From an investor’s perspective, the following KPIs and benchmarks are generally indicative of a well-managed preschool.

1. Sufficient Child Capacity to Support Critical MassThere are exceptions to every rule, but we generally look for capacity of around 150+ students. Using basic assumptions around tuition, this allows for a critical mass of revenue and profitability on a per school basis.
2. Utilization Indicative of Parent / Community SatisfactionHigh utilization is generally indicative of parent satisfaction with a school, but you don’t always need to see that a school is 100% utilized. While full utilization is encouraging, it doesn’t provide for the best student experience or organic growth outside of tuition increases, so investors will generally look for utilization of around 85%+.
3. Reasonable Operating TenureThere’s something to be said for longevity. If a school has made it past the 3-year mark, it’s generally operating under a viable model. Investors may have some hesitation around schools that have not yet withstood the test of time.
4. Relevant AccreditationNAEYC accreditation is a great stamp of approval for a private preschool operator. It shows that they not only took the initiative to make sure their school met important threshold performance and curriculum standards, but that they also passed. Investors may also take comfort with certain pedagogy-specific accreditations (e.g. American Montessori Society, Association of Waldorf Schools).
5. Strong Reputation; Proven ResultsSchools with positive online reputations show that they both are paying attention to how their brand is regarded and that they have been validated by parents. Good sites for preschool ratings include GreatSchools.org and Yelp. Assuming a sufficient number of reviews to be statistically significant, it’s hard to see how an investor would get excited about a school with below a 4-star rating.
6. EBITDA Margins in Excess of 20% for Mature Schools Tuition for private preschool has reached a level that should create for healthy profit margins for school operators. Many families are now paying upwards of $10,000 / year (or more) per child to attend preschool. Investors will generally want to see 20-30% EBITDA margins for well-managed schools.
7. Multi-Site PresenceFor a private preschool operator to be considered a “platform” for an investor, they will need to have proven their ability to replicate results across a portfolio of schools. Using general estimates about profitability on a school-level basis, many investors will want to see around 5 or so schools to provide for both a sufficient base of profitability and conviction that the management team has the capability to expand the company’s footprint by opening and/or acquiring new schools. Given the fragmentation of this industry, and the propensity for owners to operate 1-2 locations, larger operators can be harder to come by.
8. No Headline IssuesThere is nothing scarier to a parent than the threat of something bad happening to their children. So, prior incidents at a school are going to make investors extremely cautious. Depending on the severity of the issue, an incident at a school could have an extremely damaging effect on a school’s ability to survive and thrive in a local community.


We hope this illustrates why investors are taking interest in private preschools and some of the attributes they will look for in a school operator. As always, we’re here to help, so give us a call to start a conversation.

1Per dictionary.com

About ClearLight Partners

ClearLight is a private equity firm headquartered in Southern California that invests in established, profitable middle-market companies in a range of industry sectors. Investment candidates are typically generating between $4-15 million of EBITDA (or, Operating Profit) and are operating in industries with strong growth prospects. Since inception, ClearLight has raised $900 million in capital across three funds from a single limited partner. The ClearLight team has extensive operating and financial experience and a history of successfully partnering with owners and management teams to drive growth and create value. For more information, visit www.clearlightpartners.com.

Disclaimer: The views and opinions expressed in this blog are solely my own and do not necessarily reflect any ClearLight opinion, position, or policy.

Why Private Equity Likes Founder and Family Owned Businesses

Read time: 3-4 minutes

“A big business starts small.” (Richard Branson)


If you speak with a lower middle market private equity fund about what they look for in an investment, their comments will often include something like, “We like to invest in founder- or family-owned businesses.”  Others may introduce more complicated jargon and say, “We prefer to be the first institutional capital into a business.”  These statements essentially mean the same thing.  Why, though, does this matter?  It matters because there are actually a lot of different types of entities from which you can buy a business, founders and families being one of them, and making an investment in each scenario may require a nuanced approach to dealing with the seller in question.  For the sake of illustration, the table below highlights the common entities form which businesses are acquired.

Seller TypeDescription
 1. Founder or FamilyIndividuals or a collection of related shareholders that control a privately held company.
 2. Venture Capital FundA professional source of early stage capital for founder-led businesses that show strong upside potential.
 3. Private Equity FundAnother source of professional capital though for established, profitable businesses.
 4. Employee Stock
Ownership Plan
Often referred to as an “ESOP”, this is a benefit plan that gives workers an ownership interest in a company.  ESOPs are overseen by a trustee who acts as a fiduciary to protect the assets of the ESOP for the beneficiaries.
 5. Another BusinessOther corporate entities that may seek to sell (or, “divest”, or “carve out”) operating units that are non-core or underperforming.
 6. Public Company ShareholdersPublic companies can be acquired from shareholders and “taken private” if they are willing to pay a premium to entice the shareholders to sell.

So, given that many private equity funds pursue founder- or family-owned businesses as a strategy, they have clearly determined that acquiring from individuals as opposed to other investment groups or corporate entities is an attractive approach.  This article will explain why, but first let’s understand where all these family-owned businesses came from by learning about the origins of entrepreneurship in the U.S.

A Brief History of Entrepreneurship in the U.S.

Ever wonder from where the word entrepreneur originated?  Turns out it dates back to 1723, and we adapted it from the French word entreprendre which means “undertake”.  Today, we define entrepreneur as follows1:

  • Entrepreneur (än-trə-p(r)ə-‘nər): One who organizes, manages and assumes the risks of a business or enterprise

In the United States, entrepreneurship has a rich history that spans hundreds of years.  Famous Economist and Nobel Laureate Milton Friedman once wrote, “Ever since the first settlement of Europeans in the New World, America has been a magnet for people seeking adventure, fleeing from tyranny, or simply trying to make a better life for themselves and their children.”  One could even argue that America, as a nation, was in a sense built by investor-backed entrepreneurs.  For example, in 1607 the Virginia Company of England sent three ships on a four-and-a-half-month voyage to colonize American plantations.  The 100 or so passengers that disembarked settled and developed what became Jamestown, Virginia.  Relevant here is that the Virginia Company was a joint-stock company which allowed for investment in ventures with limited liability if the business failed, which was a good thing because it ultimately went broke.  You win some, you lose some.

While not often regarded for his entrepreneurial skills, Daniel Boone could be considered an early archetype of the American pioneer / entrepreneur who in 1799 departed Kentucky for a fresh start and settled along the Missouri River on a thousand or so acres of land then part of Spanish Louisiana. It was the Western migration of Boone and others that is credited with establishing the foundation for capitalism’s success in America.  During this period, a majority of these pioneers were farmers, eking out a living on small family farms, and it’s important to keep in mind that the cost of failure for such pio-preneurs was not merely financial, many paid with their lives.  In the early years, Westward migration proved challenging due to the limitations of undeveloped routes amidst the wilderness, but ultimately wagon-based travel became feasible followed by steam-powered locomotives which revolutionized human transportation.  It was the railroads that were both fueled by and facilitated future entrepreneurship.  Interestingly, some also cite the railroads as the origin of modern managerial systems given that the expanse of the railroads’ operations required new methods for managing organizations with a distributed geographic footprint.

It’s hard to believe, but prior to 1811 there had been a mere seven companies incorporated in North America.  This all changed when New York State permitted incorporation by law upon filing out the proper paperwork which freed the process from bureaucratic legislative acts and politics.  As a result, the number of corporations started in the U.S. increased dramatically, and the state of Pennsylvania alone incorporated more than 2,000 businesses between 1800 and 1860.  Consequently, the American dream of being in business for oneself expanded to include small merchants and independent craftsmen.

During the latter part of the 19th century, further Westward expansion and government incentives for industries such as the railroads, banking, and land acquisition led to tremendous opportunities for profit, which allowed entrepreneurship to flourish. During this period, entrepreneurship can also be credited with propagating capitalists, innovators, prospectors, financiers, and businessmen who created and expanded existing businesses.  It was this period that gave rise to big business and many household name companies within oil, steel, tobacco, shipping, railroads and banking.  These industries were largely unregulated, though, which led in some cases to monopolistic power and the inevitable ensuing regulation to establish a more stable business environment for companies of all sizes.

Continuing a trend that began in the latter part of the 19th century, the 20th century ushered in a dramatic increase to the scale and complexity of business in the U.S.  In many industries, small enterprises had trouble raising capital and operating at a scale large enough to efficiently produce goods for an increasingly sophisticated and affluent population. In this environment, the modern corporation, often employing hundreds or even thousands of workers, further rose in prominence. This period was responsible for the formation and success of such businesses as Ford Motor Company (1903), Hewlett Packard (1939), McDonald’s (1940), Wal-Mart (1945), Southwest Airlines (1967), Microsoft (1975) and Apple (1976).

Fueled by the internet, the 21st century has been marked by lower barriers to business formation and the creation of a new array of tech-enabled manufacturing and service-based companies both large and small.  We’ve come a long way from the pioneering ventures of early settlers and those who sought better fortunes in other parts of the U.S.  While the look, feel and focus of American entrepreneurs has changed over the years, the drive to undertake and build profitable businesses has endured paving the way for the successful family businesses of today so frequently sought after by private equity investors.

The Benefits of Investing in a Founder or Family Owned Business

Finally, and without further ado, here are some of the main reasons why lower middle market private equity funds like investing in founder or family-owned businesses:

  • There are a lot of them. One estimate is that there are 28.8 million small- and medium-sized businesses (SMBs) in the U.S. and that 19% of them are family owned.  So, 28.8M x 19% = ~5.5M family-owned businesses into which private equity can flow.
  • Aging Baby Boomer business owners are seeking liquidity. Of the ~5.5 million family-owned businesses in the U.S., nearly 4 million, or ~75% are controlled by Baby Boomers.  And, given that Baby Boomers are defined as those born between 1946-1964, that means that the Boomers are now aged between 55-73.  To that point, 47% of family business owners now report that they intend to retire within the next five years.  So, we are amidst a wave of estate planning-driven business sale activity that is buoying the population of target companies eligible for PE funds.
  • Most family-owned businesses do not survive generational transitions. Sad but true – only 30% of family businesses survive the transition from first to second generation ownership. Even worse is that only 12% survive the handoff from the 2nd to 3rd  It’s like the old saying, “Shirtsleeves to shirtsleeves in three generations.”  Most business owners are all-too familiar with these statistics and related adages, so they are looking for a safe set of hands to usher their life’s work into the future while creating a lasting home for their employees to continue their careers.  In many cases, private equity funds are the perfect acquiror insofar as they manage companies by profession and will increase the odds of a successful change in ownership.
  • Ability to develop a rapport with the founder and/or owners of the business. When you acquire a business from a corporate entity or institutional investor, the discussion is largely around price as the chief determining factor in whether the seller will transact.  However, deal discussions with a founder or family are much more nuanced.  Founders, rightfully so, want to know that what they’ve bled, sweat and cried for is going to endure into the future.  So, this creates an opportunity to build a meaningful relationship with the founder to ensure that there is a shared vision and a strong working chemistry insofar as they will continue to be involved after the deal closes.
  • The founder or family will often retain some ownership. I don’t know about you, but the notion of buying 100% of a company from a founder who has no intention of remaining involved with a company post-closing is scary to me.  This would be like someone throwing the keys at you after purchasing a car, wishing you well and then screeching off into the distance never to be seen again.  Not a good sign.  The best transactions are where the prior founder or family retains a meaningful amount of equity in the company and is aligned to help continue building the company with you.  After all, these are the people who architected the vision, strategy and culture to get the company to the point where a PE fund would want to invest in the first place.
  • Tangible growth opportunities. Once a company starts to generate substantial cash flow, the incentives to grow it can be at odds with the perceived risks of disrupting a comfortable lifestyle that a business owner has come to enjoy.  Said another way, if an owner is generating $5 million in EBITDA and is making more money than they ever dreamed they would, why undertake the investment and risk associated with growing the bottom line?  This dynamic is prevalent with many founder and family-owned businesses and creates the opportunity for a PE fund to execute on numerous “low hanging fruit” growth initiatives that have not yet been pursued.

How Private Equity Helps Founder and Family Owned Businesses

1. Wealth DiversificationFor many entrepreneurs, their business represents their largest single financial asset.  This concentration of wealth created by the business creates an inherent risk to their net worth should something happen to adversely affect its valuation.  Therefore, a transaction with a private equity fund helps to diversify a business owner’s net worth by generating liquidity (i.e. cash) for the founder or family owner.
2. Team DevelopmentWhile many family or founder-owned businesses can generate strong growth and profitability for a time, they will ultimately stagnate if they haven’t invested in a team that can manage a larger organization with its new assortment and complexity of challenges.  And, we routinely see certain departments that have been under- or undeveloped such as Finance or Sales.  The good news is that private equity funds are in the common practice of helping companies supplement their teams with high quality talent who can help the business get to the next level.
3. Business BuildingBeyond team development, many founder and family-owned businesses have not fully embraced best practices regarding systems or process.  In order for small companies to become big companies, they need to be built upon a framework that will support the transition to a larger organization.  This applies to things like data capture & analysis, workflow management, compliance, and financial controls.  Given that private equity funds invest across a portfolio of companies, they have an excellent vantage point to identify and help implement the necessary systems and/or processes to help management teams drive their business forward.
4. Financial SophisticationPrivate equity funds have earned a reputation for taking an analytical eye to the businesses in which they invest.  Frequently, a founder or family-owned company’s prior reporting processes will evolve under new ownership to become both more strategic and granular.  Business owners will get a flavor of this during the due diligence process when an investor begins analyzing the business to better understand it.  A test of whether a fund is focused on the right things is if an owner gains new and valuable insight about their company that they had not previously considered.  The end goal is for a company’s investors and management team to know precisely where the key drivers of value exist and focus on the areas that really move the needle.
5. Capital For GrowthDon’t forget that private equity funds often reserve capital to support the growth of their partner companies beyond what it takes to close the deal.  For many businesses, growth via the acquisition of smaller businesses in the same industry can be an excellent way to increase scale and profitability.  So, if you aspire to acquire smaller businesses and fold them into your organization, make sure to ask any investors with whom you are speaking about their ability to fund future deals.
6. “Two Bites of the Apple”In many cases, a private equity fund will want the founder or family shareholders to retain some ownership following a transaction.  The helps ensure that the person or people that drove a company’s prior successes are aligned with the new investor’s goal of supporting future growth. The amount of retained ownership varies for each deal but generally ranges from 10-30%.  By holding onto some of the equity in the business, owners stand to benefit from the next exit if the business increases in value.  In some cases, we’ve seen the proceeds from an owner’s second transaction, or the “second bite of the apple” exceed proceeds from the initial transaction.


We hope this sheds some light on why private equity funds like investing in founder and family-owned businesses.  As always, we’re here to help, so give us a call to start a conversation.


1Merriam Webster

About ClearLight Partners

ClearLight is a private equity firm headquartered in Southern California that invests in established, profitable middle-market companies in a range of industry sectors. Investment candidates are typically generating between $4-15 million of EBITDA (or, Operating Profit) and are operating in industries with strong growth prospects. Since inception, ClearLight has raised $900 million in capital across three funds from a single limited partner. The ClearLight team has extensive operating and financial experience and a history of successfully partnering with owners and management teams to drive growth and create value. For more information, visit www.clearlightpartners.com.

Disclaimer: The views and opinions expressed in this blog are solely my own and do not necessarily reflect any ClearLight opinion, position, or policy.

This is Why Culture Eats Strategy for Breakfast

This is Why Culture Eats Strategy for Breakfast

Read time: 2-3 minutes

Culture is a hot topic these days. By now, you’re probably familiar with Netflix’s famous 100+ slide deck outlining their corporate values and have enjoyed Simon Sinek’s highly viewed Ted Talk musings on how good leaders make people feel safe.  However, it seems we’re hearing ever more about how this elusive dimension of organizational behavior is being embraced by top companies. Why it’s taking root so prominently now I can’t say, though Winston Churchill might have been onto something when he said, “Americans can always be counted on to do the right thing, after they’ve exhausted every other possibility.” That is to say, perhaps companies are now concluding that financial success is, after all, an ensuing result of creating a cultural framework that enables high-quality teams to achieve as opposed to something that is pursued without regard for the softer side of how you get there.

This is Why Culture Eats Strategy for Breakfast

To be clear, this blog is not about how to create a good company culture. There’s been plenty written about that, and I’m still not fully convinced that culture isn’t just a reflection of senior leadership’s behavior and how they reward the cardinal virtues they espouse. What I’d like to explore is why I think that Peter Drucker’s famous, “Culture eats strategy for breakfast” line has withstood the test of time and is presently top of mind for leaders at the helm of companies large and small. To do that, I’ll share the following ways that strong cultural dynamics have contributed to the success of organizations with which I’ve been affiliated. So, without further ado, strong cultures…

  • …encourage risk taking that leads to innovation. If the standard of performance is perfection, then people will simply talk themselves out of otherwise good ideas for fear of diminishing their internal status (or worse). However, when it’s OK to make mistakes in the name of progress, employees will take initiative and experiment with new ideas. More often than not, these ideas, while good, won’t move the needle and may even fail. However, without feeling safe enough to try something new, the truly game-changing ideas that allow you to stay ahead of your competition will not come to fruition.
  • …allow people to be vulnerable to promote problem solving. If people aren’t comfortable sharing challenges holding them back, then they’ll simply stew in frustration for fear of seeming like they aren’t up to the demands of their job. This will consequently hold the company back from progress it could otherwise be making. However, when people are willing to articulate problems and approach colleagues for advice, then the maxim of two heads being better than one will prevail. True success is when people can be vulnerable in front of a group of peers and/or superiors to access the best of their collective wisdom.
  • …reduce the energy wasted on fighting internal battles and focus on beating the competition. In many companies, an employee is forced to fight battles on two fronts – the external (i.e. against the competition), and the internal (i.e. against culture and the agendas of other employees). From my experience, external competitive forces are sufficiently formidable to require complete and undistracted focus. The challenge is that internal struggles are real and often result in a host of counterproductive emotions, most powerfully, worry. I’ll admit that of all the nights I’ve lost sleep in my career, the vast majority have been due to internal issues. Imagine how much stronger your organization would be if 100% of the team’s energy was focused on beating the competition.
  • …motivate people to show off their superpowers. This begins with the understanding that each person has a “genius” and that a universal yardstick of ability simply cannot be applied to everyone. If a culture singularly exalts a narrow skillset, then people won’t be energized to exhibit lesser-valued skills that a company may desperately need. There’s a reason it’s beautiful watching cheetahs sprint and dolphins jump acrobatically in the ocean – while different, those behaviors are what those animals are the best at, and they don’t hold anything back. What if observing your team was as fun as watching Blue Planet? Or, better yet, X-Men?
  • …speak to the person, not their position, to engender respect throughout the organization. There are hierarchies within every organization and roles that are more glamorous than others. And, usually, people are keenly aware of where their activities stack up in the pecking order of internal respect. One of the faster tactics I’ve seen to demotivate an employee is to engage with them as though their role deserves inferior treatment. Conversely, when a person is treated with respect, regardless of function, it has a way of helping that person find meaning and dignity in their activities which can compound to create unforeseen benefits to the business.
  • …recognize achievements that advance important goals. No better way to get a team to keep doing more of what works and less of what doesn’t than to acknowledge strong performance. If this praise comes from the top, you can all but guarantee that others will follow suit. I’ve had bosses make my entire week just by saying “good job” about something I didn’t think they had noticed. All things being equal, happy employees have got to outperform the alternative.

While not an exhaustive list, I can say that I’ve experienced both the good and bad sides of these dynamics. Goes without saying that I’ve functioned at my best when I’ve felt safe enough to innovate, been comfortable asking for help, didn’t worry about internal frictions, knew that my skills were valued, felt respected and received recognition. Interested in your thoughts – how else do strong cultures make employees and companies better?

About ClearLight Partners

ClearLight is a private equity firm headquartered in Southern California that invests in established, profitable middle-market companies in a range of industry sectors. Investment candidates are typically generating between $4-15 million of EBITDA (or, Operating Profit) and are operating in industries with strong growth prospects. Since inception, ClearLight has raised $900 million in capital across three funds from a single limited partner. The ClearLight team has extensive operating and financial experience and a history of successfully partnering with owners and management teams to drive growth and create value. For more information, visit www.clearlightpartners.com.

Disclaimer: The views and opinions expressed in this blog are solely my own and do not necessarily reflect any ClearLight opinion, position, or policy.

Franchisors vs. Franchisees: Why Private Equity Likes Both

Read time: 4 minutes

“Long-term consistency beats short-term intensity.” (Bruce Lee)

Introduction & Definitions

It’s official, private equity investors like franchises. This wasn’t always the case, but in recent years, there’s been a wave of private equity funds investing behind multi-unit concepts of all varieties. During 2018, significant franchisor acquisitions by private equity funds included Jamba Juice ($200 million), Sonic Drive-In ($2.3 billion) and Zoe’s Kitchen ($300 million) to name a few. In 2019, we’ve seen CorePower Yoga, Hooters and Whataburger attract new investors. What’s interesting is that a historical preference for franchisors has become more balanced in that private equity funds are starting to take material interest in franchisees as well. So, we thought it was worth exploring the nuances between the franchisor and franchisee model and explaining a few of the reasons why private equity sees strong investment returns potential in both strategies.

Introduction & Definitions

To start, let’s define the relevant terms1 :

  • Franchisor – The entity that establishes a brand’s trademark or tradename and a business system. Franchisors make money by charging its franchisees up-front fees and royalties as a percentage of revenue, typically around 5-6% (though there are exceptions to this rule of thumb).
  • Franchisee – Often a small business owner that pays a royalty and an initial fee for the right to do business under the franchisor’s name and system. Outside of royalties and, sometimes, marketing or other fees, the franchisee keeps whatever profits they generate from operating their business. When successful, it’s common for franchisees to own multiple units within a franchised system.

A Brief History of Franchising in the U.S.

A Brief History of Franchising in the U.S.

Not only was he one of the Founding Fathers of the United States but, you guessed it, Benjamin Franklin instituted the first franchise system in 1733. When he wasn’t busy inventing the lightning rod, bifocal glasses, swim fins, a stove bearing his name, and a much-needed update to a sadistically inflexible urinary catheter, Mr. Franklin evidently found time to strike a deal with one Thomas Whitmarsh to establish Whitmarsh as a printer in Charleston, SC. The deal was that Franklin would rent space for the printing operation and provide any equipment in exchange for one third of the profits over a six-year period. At the end of the term, Whitmarsh would be able to buy the equipment back from Franklin and work for himself free and clear. Whitmarsh went on to print such reads as the South-Carolina Gazette and local copies of Poor Richard’s Almanack. Franklin replicated this model in other cities that had either no printers or light competition by partnering with employees that demonstrated good work ethic.

Despite Franklin’s earlier claim, many sources credit Isaac Singer, the founder of sewing machine manufacturer Singer Corporation, with the creation of the modern franchising model in the mid 1800’s. Like Franklin, Singer used franchising as a means to quickly expand. Singer distributed his sewing machines throughout the U.S. via a network of licensees that paid both a licensing fee and were required to teach people how to use the sewing machines.

The bottom line is that franchising has been around for hundreds of years and has withstood the test of time. Thanks to these and other founding fathers2 of franchising, the U.S. is now home to over 700,000 franchised businesses. While there are not yet as many private equity firms in the U.S., perhaps 1-2 thousand depending on who you ask, the amount of capital they have raised should make it no surprise that they’ve discovered ways to generate strong investment returns in franchisors and franchisees alike.


What PE Firms Want to See in a Franchise System

Investment criteria across private equity firms for franchises may vary, but it’s safe to assume that most professional investors are going to look for one more of the following attributes when looking to back a franchisor or franchisee:

What a “Good” Franchise Looks Like to a PE Fund
Lender Product or Service that is Staightforward and Can be Consistently ReplicatedA system’s growth will usually be driven by franchisees, so the product or service needs to be something that can be quickly mastered by a small business owner and/or employees that may not have prior experience in the industry. Further, franchisees will need to consistently meet the brand standards set out by the franchisor such that the system upholds a consistently strong reputation across its network of operators.
Lender Product or Service that is Sustainably “On Trend”Systems that benefit from sustainable and easy to understand tailwinds are going to be more attractive to private equity investors. Most private equity funds are adept at discerning trends from fads, so if the shiny new product doesn’t appear to have staying power, then they may pass on making an investment.
Lender Universal Appeal Across Geographies3Some products or services may be relatively more embraced in certain geographies than others. A good example might be a food concept that is cherished in one part of the country but is not portable to other markets based on regional dietary preferences. So, investors will look for systems that are thriving within their original markets as well as new markets that they’ve entered. Example: Have you ever been to a part of the country that doesn’t have a McDonald’s?
Lender Sufficently Long Operating HistoryMuch like how investors evaluate non-franchised businesses, it’s comforting if a franchise has an operating history that suggests long-term viability. If a system is too young, investors may pause in favor of those with more longevity.
Lender Critical Mass of UnitsSystems that offer a critical mass of units, say 50 or more, tell investors a few things. First, they’ve been able to attract a good number of franchisees who were willing to incur the fees, development costs and risk associated with starting up a new location. Second, if the locations have been open for a while, then it suggests longer-term viability of the concept, though investors will also want to know how many locations have closed. Third, the larger the system, the more resources a franchisor will have to support their growing network in areas like marketing. Lastly, larger systems will have survived a lot of growing pains that smaller franchises experience and often emerge more ready to support future growth.
Lender Good Unit EconomicsUnit economics are the financial investment and results one might expect in opening and operating a single location. The basic ingredients to a good unit economic profile include return on investment (ROI) from build-out costs and same-store-sales growth, but there are a lot of metrics one can analyze within a franchised system. For more information on unit economics see “A Crash Course on Unit Economics” below.
Lender Successful FranchiseesGood franchisors want franchisees to be successful and happy. It’s a good sign if you see a high incidence of multi-unit franchisees – this suggests that a franchisee was sufficiently happy with the result of their first location to open additional locations. Systems with successful franchisees will be better at attracting new franchisees and have better prospects for growth.
Lender Runway for Future GrowthPE funds want to see that systems offer sufficient “white space” to permit growth during their ownership period and beyond such that they’ll be able to attract buyers when they seek to exit. In other words, there needs to be enough undeveloped territories to allow future investors to make a good return on their investment.

A Crash Course on Unit Economics

Given what is often a large number of units operating within a franchise system, there is no shortage of data that can be analyzed. However, the essential metrics for most investors are relatively straightforward and relevant across franchised concepts. The good news is that some of these metrics will be profiled in the Franchise Disclosure Document (FDD). The graphic below summarizes how investors will usually look at and assess unit economics:


Common Unit Economics Analyzed by Private Equity Investors
Build-Out Costs Build-Out Costs
The initial fees and investment required to open a new location.
Should be examined in connection with how much EBITDA a mature location will generate, and how quickly. More modest build-out costs make systems accessible to more prospective franchisees, but build-out costs need to be taken in a broader context of return on investment.
Time to Profitability Time to Profitability
How quickly a unit becomes cash flow positive.
Will be important to franchisees with less liquidity to weather the cash burn phase. All else equal, a system where franchisees become cash flow positive faster will be more attractive.
Time to Recoup Build-Out Costs Time to Recoup Build-Out Costs
How quickly a franchisee earns back build-out costs from a unit’s profits.
A franchisee’s ability to quickly recoup build-out costs will allow them to open up new units to their benefit and the benefit of the franchisor.
Time to Maturity Time to Maturity
The length of time until a unit achieves steady-state Revenue and EBITDA.
Like other unit economics categories, faster is better. A good benchmark is under 3 years for a unit to achieve maturity, but this varies and needs to be taken into consideration alongside other unit economic categories.
Mature Revenue, or “Average Unit Volume” Mature Revenue, or “Average Unit Volume”
The point at which Revenue growth slows to a long-term rate.
As you might expect, bigger is better for AUV. The greater the Revenue potential, the better the opportunity to generate profits for franchisees. A good benchmark for AUV is $1MM+.
The point at which EBITDA growth slows to a long-term rate.
The amount of EBITDA a location generates is critical for a franchisee. It’s the difference between the owner “buying themselves a job” vs. buying themselves a profitable business that generates cash flow that can be reinvested in new units or distributed to shareholders.
Build-Out Costs / Mature EBITDA Build-Out Costs / Mature EBITDA
A ratio that highlights how much upside exists between the cost for de novo units relative to an expected sale multiple.
This is as close to a golden ratio in franchise investing as you are likely to get. This simple calculation will tell you what it costs, in terms of an implied EBITDA multiple, to open new units. In this case, the lower the number, the better. Example: If build-out costs are $500k, and a mature location will produce $250k of EBITDA, then the ratio is 2x.
Same-Store Sales Growth Same-Store Sales Growth
The annual growth rate of a cohort of units that were opened for a full year or longer.
A unit’s growth rate will typically depend on how long it’s been open – younger units should grow at a faster rate than those that have been open for several years. So, it makes sense to look at growth rates by year of opening. However, same-store sales growth can also be analyzed across an entire portfolio of stores to give a sense for the general health of the system.

The Pros and Cons4 of Franchisors vs. Franchisees

Now that we’ve covered what franchising is, its history, what an investor looks for in a franchised business, and the ABCs of unit economics, we can finally share why investors like investing in both franchisors and franchisees. Like any sector, there are positives and negatives, but for many investors the pros far outweigh the cons in franchising. The following table highlights the respective merits and limitations of investing in franchisors and franchisees from an investor’s perspective:

The Pros and Cons 4 of Franchisors vs. Franchisees


We hope this sheds some light on how private equity funds evaluate franchises and why they have made substantial investments into both models. As always, we’re here to help, so give us a call to start a conversation.


1Definitions from franchise.org.

2William Metzger (pictured above) purchased the first independent car dealership from General Motors in 1898. By working with franchisees in exclusive territories, OEMs like GM and Ford were able to bring their products to market more efficiently, and over longer distances. Famously, Ray Kroc (above) opened the first McDonald’s franchise restaurant in 1955. Shortly thereafter he set up the company that would become the McDonald’s we know today. By working with franchisees across the U.S., Kroc grew his system to over 100 restaurants by 1959.

3The exception to this rule is if a concept is more regional yet the region supports a sufficiently large addressable market.

4Believe it or not, Benjamin Franklin is also credited with developing the idea of a Pros and Cons list.

About ClearLight Partners

ClearLight is a private equity firm headquartered in Southern California that invests in established, profitable middle- market companies in a range of industry sectors. Investment candidates are typically generating between $4-15 million of EBITDA (or, Operating Profit) and are operating in industries with strong growth prospects. Since inception, ClearLight has raised $900 million in capital across three funds from a single limited partner. The ClearLight team has extensive operating and financial experience and a history of successfully partnering with owners and management teams to drive growth and create value. For more information, visit www.clearlightpartners.com.

Disclaimer: The views and opinions expressed in this blog are solely my own and do not necessarily reflect any ClearLight opinion, position, or policy.

How to Value a Private Company

Read time: 3-4 minutes

“Strive not to be a success, but rather to be of value.” (Albert Einstein)


As a business owner, you probably have a general sense for the range of value for your company based in formal or informal analysis. However, you never truly know what it’s worth until you see what a buyer is willing to put in writing. Therefore, it’s important to understand how investors are likely to approach the valuation exercise so that you can be grounded in reality and ask informed questions of suitors at the appropriate time. The following guide will walk you through the common valuation methods, some key financial information used as inputs to determine value, and some tips to increase your valuation.

Common Business Valuation Methods

A lot of terminology gets thrown around when people start talking about valuing private companies. However, at their core, regardless of what they are called, they are simply ways to put a present value on future cash flows. Here are some of the most common and practical approaches investors will take.

Description of Each Valuation Method
Lender 1. Public CompsWithin your industry, there are often comparable public companies whose business is similar to yours, though on a larger scale. These public peers, or “comps”, have valuations that are publicly available and can provide guidance around how your business will be valued. Most investors will look to EBITDA and/or Revenue multiples, though there are an array of other ratios that can be analyzed if so inclined. Please remember, though, that a public comp will often be valued at considerably more than a smaller, private peer due to the inherent value of larger scale and the ease with which you can buy and sell public shares. So, in order to determine the value of your smaller, private company, you will typically have to apply a discount to the public comps.
Lender 2. Precedent TransactionsThe specifics of private transactions in your industry can be hard to come by if they are not disclosed, but in many instances details around the purchase price and implied multiple of EBITDA find their way to the public domain. Further, various entities (e.g. investment banks) that focus on your industry will often publish industry reports that summarize information about comparable private transactions. These reports can give you a good idea what sort of multiple you might fetch for your business.
Lender 3. Returns ModelingIf you are speaking with a private equity fund or other “financial buyer”, it’s likely that they will do some returns modeling around various growth assumptions for your business. Typically, private equity funds are shooting to double or triple their money over their investment period, and this will impact what they can pay. The most common returns modeling is called an “LBO Model” which forecasts out 5 or so years of performance with certain assumptions regarding the amount and type of debt the buyer would intend to put on the business.
Lender 4. Perception of ValueExperienced investors will often have an intuitive feel for a company’s worth if provided with sufficient information about historical / projected performance. It’s probably discounting the value of this intuition to call it “gut feel”, but veteran investors can often come extremely close to an accurate EBITDA multiple without traditional analysis. Whether they will admit it or not, many investors consult their intuition before other more analytical methodologies.

Key Financial Information Used to Value a Private Company

If you decide to sell your company, there’s no question that it will ultimately entail the provision of a large amount of data to a potential buyer. However, in the early stages of courtship, the items below are typically sufficient for an investor to arrive at a preliminary valuation range. If you decide to explore discussions with investors, you should make sure you at least have the following items readily available and well organized for when they ask:

Key Financial Information Used to Value a Private Company

  • Last Twelve Months (LTM) Adjusted EBITDA. Businesses are most commonly valued on a multiple of LTM Adjusted EBITDA. Therefore, this number is the single most important input to determining your valuation. Note that we’ve incorporated the term, “Adjusted” here. It’s important to present an EBITDA figure that reflects your company’s profitability if it were to be owned by another entity. In other words, if there are non-recurring or inflated expenses (e.g. Country club memberships, vehicles, etc.) that would not be incurred under new ownership, it is customary to add these expenses back to arrive at a normalized, or Adjusted EBITDA figure. Just don’t get too creative here lest you lose credibility with an investor. Last Twelve Months (LTM)
  • 5-Year Historical P&L. A 5-year snapshot of your income statement will give an investor a good idea of how Revenue, Gross Profit and EBITDA have been trending along with your various expense line items. This is important because if Revenue and profitability have been steadily increasing, that will give an investor comfort that your trajectory is relatively more likely to continue than if the alternative were true. These days, we sometimes even ask for a 10+ year history to see how a business performed during the Great Recession as a proxy for how it might weather a future downturn. A longer operating history becomes more important if a business or industry is inherently cyclical (e.g. Building products).
  • Most Recent Balance Sheet. Balance sheets illuminate a few things of relevance to investors. One of the more important items is the degree to which your business consumes capital, or is “working capital intensive”. In other words, is a lot of cash trapped in receivables and inventory, or is the company efficient at converting P&L results into cash? This matters because as a business grows, a company that is more working capital intensive will consume more cash flow as it builds inventory, increases its receivables balance and funds various other asset line items. Here’s how most investors will assess your level of working capital intensity:

    Net Working Capital = Current Assets (Excluding Cash) – Current Liabilities (Excluding Debt)

    Net Working Capital

  • Capital Expenditures (“CapEx”). Investors care about CapEx because it represents cash that has to be reinvested into a business to maintain and grow its profitability. Varying levels of CapEx across businesses and industries means that not all EBITDA is created equal. To that end, a common metric that buyers will evaluate is Adjusted EBITDA minus CapEx as an approximation for the true profitability of a business, or “free cash flow”. Take a look at the following example that highlights how CapEx can sway the amount of free cash flow a business is generating:

    Free Cash Flow = Adjusted EBITDA – CapEx

    Capital Expenditures (“CapEx”).

  • Top Customer Summary. Most investors are allergic to customer concentration, so they’re going to want to know early in your discussions whether you have exposure to any single or small group of accounts. When requesting this item, investors will usually tell you that it’s OK to share your customer information on a no-names basis in recognition of its sensitivity. Ideally, you will have a few years of historical data regarding revenue by customer for each account to highlight any year-over-year variations in revenue, but a top 10 summary will usually suffice. Here’s an example of what such a summary may look like:
    Top Customer Summary.

Tips to Increase Your Valuation

You’ve probably heard many of these before, but it never hurts to refamiliarize yourself with some essential business attributes that will attract investors and support a stronger valuation for your company. You can also download our guide to maximizing your exit valuation here.

Tips to Increase Your Valuation

  • Reduce Customer Concentration. A dependence on large customers is a primary reason why an investor will pass or reduce valuation. Your goal should be to have your top customer generating less than 20% of total revenue. Above that level you will lose interest from a lot of suitors due to the risk of that customer going away. Many tenured investors have learned this lesson the hard way and are not likely to make the same mistake twice.
  • Create the “Dream Team”. An overdependence on a company’s founder or CEO can scare investors that are leery of “key man risk”. A new investment partner will want to see that your company’s customer relationships have been institutionalized and that you have a talented supporting cast of executives ready to drive the business forward.
  • Target High Growth End Markets. We’ve all heard that “a rising tide lifts all boats”, and most investors will agree that the tailwinds behind a good industry can be a powerful driver of good financial returns. So, if your product or service is supporting a sector with lackluster growth, it might be worth entering, or seeking help entering, some more attractive market segments.
  • Embrace Financial Sophistication. This is where a talented CFO or operator can really move the needle. You cannot underestimate the value investors place on seeing accurate, timely and strategically insightful financial information. In general, financial reporting that reflects a professionally managed organization will help an investor get comfortable that you have a good grasp of the operations. Audited financials are another indicator the business has been managed to build long-term value. At a minimum, make sure any information provided to investors ties out across the various reports you send over.
  • “Culture Eats Strategy for Breakfast”. A strong culture is palpable to an investor and is an important dimension in understanding a company’s prior successes and prospects for future growth. All else being equal, a passionate, energized team is always going to be more encouraging. Some easy indicators of this are demonstrated by Mission, Vision, Values driven organizations with leadership that walks the walk and employees that like coming into work every day.
  • Consistency is Key. Historical ups and downs in revenue or profitability will make investors pause. If you can show sustained upward trajectory in both revenues and profit, then you are on your way to a better valuation. With that in mind, make sure to grow the right way with higher margin, recurring revenue when possible.


We hope you found this guide useful in gaining a better understanding for how professional investors will approach valuing your company. We’ve been investing in privately held companies for nearly 20 years now and would be happy to walk you through our proven process that has resulted in over 20 closed transactions with business owners. We’re here to help, so give us a call to start a conversation.

About ClearLight Partners

ClearLight is a private equity firm headquartered in Southern California that invests in established, profitable middle-market companies in a range of industry sectors. Investment candidates are typically generating between $4-15 million of EBITDA (or, Operating Profit) and are operating in industries with strong growth prospects. Since inception, ClearLight has raised $900 million in capital across three funds from a single limited partner. The ClearLight team has extensive operating and financial experience and a history of successfully partnering with owners and management teams to drive growth and create value. For more information, visit www.clearlightpartners.com.

Disclaimer: The views and opinions expressed in this blog are solely my own and do not necessarily reflect any ClearLight opinion, position, or policy.

How to Find an Investor for Your Business

How to Find an Investor for Your Business

Read time: 3-4 minutes

Introduction & Definitions of the Different Types of Investors

Raising capital is often cited as one of the more difficult exercises in business which is a fascinating paradox given how much of it is available to business owners. Globally, there is over $1 trillion of uninvested capital at the ready to be deployed, so why then is the process of finding an investor so challenging? To start, investors come in a variety of shapes and sizes, and there are a LOT of them to choose from.

Not to worry, we’re here to help. Like any good journey of understanding, it’s important to start by defining key terms to make sure you are clear on the characters you may encounter on your quest to find the right investor for you. Here are the most common categories of investors from which you can choose (no particular order):

 Description of Each Investor Type
Lender 1. LenderPassive investors offering debt in exchange for scheduled principal and interest repayments. This is the most risk averse category of investor who will want to see tangible collateral protecting their investment in the form of assets (e.g. Receivables, inventory, real estate) and/or personal guarantees. Capital from lenders can be used to fund growth / expansion, satisfy short-term cash needs and sometimes allow you to take money out of the business in the form of a dividend.
Angel Investor 2. Angel InvestorHigh net worth individuals who have both the personal liquidity and risk appetite to make non-control investments into early stage companies. Alongside a founder, angels will often be some of the earliest equity capital into a business. Angels will come from various walks of life – in some cases they will have generated their wealth from entrepreneurial or other business pursuits, though they are likely to be passive investors. Angels are frequently part of angel networks that periodically congregate to source and evaluate early-stage investment opportunities.
Venture Capital 3. Venture CapitalA professional source of early stage capital for founder-led businesses that show strong upside potential. Venture capital firms (or, VCs) raise committed capital from Limited Partners and focus on businesses that are frequently pre-profitability (in some cases, pre-revenue). VCs typically invest in a larger portfolio of 20-40+ companies from their fund with the understanding that a mere 20% of their investments will produce 80% of their targeted returns. VCs are usually non-control investors, though many hail from entrepreneurial backgrounds and may be a good source of guidance given analogous experiences.
Growth Equity 4. Growth EquitySimilar to how this definition is situated in this chart, growth equity investors exist somewhere between venture capital and private equity. Growth equity investors may pursue more traditional VC and/or PE-style deals, but the name generally implies that they are making non-control investments into later stage businesses. Because growth equity deals traditionally have less upside potential than VC deals, a growth equity investor will be less tolerant of investment losses and may seek more downside protection than some of the earlier stage investors profiled above. It would be common for a growth equity investment to be “structured”, meaning that their investment would be in the form of a preferred class of stock possessing features not offered to other shareholders (e.g. accruing dividends, liquidation preference, etc.).
Private Equity 5. Private EquityAnother source of professional capital though for established, profitable businesses. Private equity (or, PE) investors raise funds from institutions (e.g. pension funds, endowments, insurance companies) to take controlling (51%+) ownership positions in companies generating positive EBITDA and with strong growth potential. In many cases, PE funds will encourage businesses owners to retain equity (or “rollover”) in the company to create shared interests in supporting future growth. PE investors will usually target a 2-3x return on their capital over a 3-5+ year investment period before seeking an exit. PE funds invest across a wide range of company sizes, though many “middle market” firms pursue founder or family-owned businesses valued at $100MM or less.
Family Office 6. Family OfficeEntities established by high net worth families to manage the wealth and investing activities of that family. Family offices are not mandated to deploy capital in the same way, say, a VC or PE fund might be and may be more selective in the investments they choose to make. This is especially true given that they are investing their own capital as opposed to capital raised from other sources. Further, family offices will often have longer investment horizons, meaning that they can invest in perpetuity in a business given that they won’t have external constituencies looking to generate near-term returns. Family offices can differ in their approach to managing investments in private companies but reputationally skew more passive in their approach.
Search Fund 7. Search FundThese firms are typically led by 1-2 newly minted MBAs that raise funding from high net worth individuals to identify a single acquisition target that they intend to run as CEO post-closing. Search funds frequently elevate recurring revenue services businesses in their list of acquisition criteria and prioritize finding a founder / owner seeking to transition out of the business to create room for the “search funders” to take control of the day-to-day operations. Note that search funds do not have authority over their investors’ capital in the way that a PE or VC fund might as General Partners. Rather, search funds need to present investment opportunities to their backers who then can approve or deny an acquisition.
Independent Sponsor 8. Independent SponsorThese groups will look and feel like private equity investors in many ways, though the primary distinction is that they do not have the capital to invest. Independent sponsors are frequently professionals that were previously affiliated with private equity funds and decided to set off on their own to source and structure deals to be funded by a third party. There are over 300 or so independent sponsor groups across the country, so it is an established population, but it’s important to know that if you agree on a deal, the next step will be for the independent sponsor to find someone to fund the transaction. Often times, independent sponsors shine in helping to identify hidden value in an opportunity where other investors passed.

The many nuances of each investor type can be tough to commit to memory, so here’s a chart that visually summarizes the key distinctions between the various groups:

Step 1: Determine the Type of Investor You Need

Step 1: Determine the Type of Investor You Need

They say a picture is worth a thousand words, so I figured the flow chart below would be a more efficient way to help you determine the type of investor that is appropriate for your business. Once you know what you’re looking for, you can proceed to “Step 2” for instructions on how to build your contact list.

Step 2: Build a Contact List

Step 2: Build a Contact List

So, now you know the type of investor you’re looking for. Here are the information resources you will want to check out to build a list of firms to reach out to:

 Information Resource
GoogleIt may seem a little too obvious, but Google can be an excellent way to find the type of investor you’re looking for. This is because the more sophisticated investors in each category will have invested in developing a digital presence such that they are easy to find. Give it a shot, you’d be surprised with how many firms you can identify this way.
Linked inWhile the majority of LinkedIn connectivity is person to person, you can search for keywords that may help highlight potential investors for your business. An added benefit is that you’ll also be able to quickly identify any connections (1st, 2nd, 3rd degree) to groups that pop up in your search.
Pitch BookPitchbook is a subscription information platform frequently used by investors and companies alike. The user interface is highly intuitive, and they frequently make feature updates that make it ever more powerful as a search tool. Start by requesting a free trial – this may be enough to build your initial list or you may find value in becoming a subscriber.
CrunchbaseThis is another business information platform centered around companies and investors. It offers a searching tool that allows you to filter their database of thousands of contacts and home in on the types of groups and people you are looking for. Similar to Pitchbook, certain features require a subscription, but you can access a free trial.

Step 3: Reach Out to Your List of Contacts

Each category of investor has their own distinctions in terms of the types of companies / situations in which they invest and, similarly, the way you get in touch with each of them is also nuanced. So, once you have your contact list in hand, here’s how to get in touch with each type of investor directly. Please note, though, that a warm intro into someone at a firm in which you are interested will always be preferable to a cold outreach. This guide is simply to point you in the right direction if you can’t get such an intro.

 How to Get in Touch with Each Type of Investor
Lender 1. LenderLenders will frequently employ business development officers (BDOs) whose primary job is to identify commercial lending opportunities. These professionals are compensated based on their ability to surface leads, so they should respond ASAP to any inbound inquiries. Look for titles on their websites that sound like “business development” or “relationship manager”.
2. Angel Investor 2. Angel InvestorMost angel networks have a website that will tell you how to contact their members or the broader organization. One option is to apply for funding through a general submission form, the other is to identify higher ranking members of the network and reach out to them directly via email or LinkedIn.
3. Venture Capita 3. Venture CapitalVCs tend to have fairly aggressive investment sourcing processes, so they should be relatively easy to get a hold of if you have a promising business. Like banks, many VCs have professionals solely focused on deal origination, so those professionals may be a good starting point. Shoot them an email and see what you hear back. However, make sure the firm’s sector focus areas align with what your business does to improve your response hit rate and reduce any wasted time. If that doesn’t work, review their team’s bios to see whose entrepreneurial experiences may align with yours – if they deem you to be a kindred spirit, that should yield a response.
4. Growth Equity 4. Growth EquityMany growth equity investors have dedicated deal sourcing teams, so this is a good place to start. Scan through the bios and look for language that references “sourcing” or “business development”. If not, start at the top of the org chart and work your way down until you get a response. Persistence should pay off even if it takes a few followup attempts.
5. Private Equity 5. Private EquitySame as growth equity & VCs, it’s common for PE funds to have dedicated deal sourcing professionals. Insofar as it’s these individuals’ jobs to identify new investment opportunities, they will be happy to hear from you. Look for titles with the words “Investment Development”, “Business Development”, “Deal Sourcing”, or “Origination” in them. As with other professional investment firms, make sure their investment criteria aligns with your business in terms of industry and the amount of EBITDA you are generating.
6. Family Office 6. Family OfficeGood luck. There’s a saying, “If you’ve met one family office, you’ve met one family office.” All that means is that “family office” can mean a lot of different things and getting through to the decision maker can be a real challenge. To improve your odds, look for family offices that advertise investment activity of the variety that your business presents. In other words, if a family office has made all of their money in real estate and seems to focus within that asset class, it may not be worth approaching them about your manufacturing business. Your best bet is to start at the top and work your way down. If you can’t get a response from the head of the office, many of these groups have a Chief Investment Officer or CFO that may be a good starting point.
7. Search Fund 7. Search FundThe good news about search funds is that they are run by 1-2 people whose sole purpose is to find a business to buy, so they will be highly motivated to respond to your call email. Of every investor type profiled here, a search fund will be relatively more likely to respond to a cold call or email. Plus, they spend most of their time sending out emails and letters to prospective targets, so someone seeking to have a conversation about a deal will be most welcomed.
8. Independent Sponsor 8. Independent SponsorSimilar to search funds, independent sponsors spend most of their time hunting for new investment opportunities. In the rare instance that a business owner actually calls them, they will be highly likely to return the call. Your best bet is to reach out to the founder directly. Just make sure to probe on their network of capital sources because they won’t directly control the capital needed to close on a transaction with you.


I realize that was a lot of information, but hopefully you’re now armed with knowledge about the type of investor your need, how to build a list of contacts and best practices in reaching out to each type of investor directly. As always, we’re here to help, so please reach out to start a conversation.

About ClearLight Partners

ClearLight is a private equity firm headquartered in Southern California that invests in established, profitable middle-market companies in a range of industry sectors. Investment candidates are typically generating between $4-15 million of EBITDA (or, Operating Profit) and are operating in industries with strong growth prospects. Since inception, ClearLight has raised $900 million in capital across three funds from a single limited partner. The ClearLight team has extensive operating and financial experience and a history of successfully partnering with owners and management teams to drive growth and create value. For more information, visit www.clearlightpartners.com.

Disclaimer: The views and opinions expressed in this blog are solely my own and do not necessarily reflect any ClearLight opinion, position, or policy.