Private equity companies are typically associated with more publicized acquisitions, such as the takeover of the Hudson’s Bay, but PE firms have also begun consolidating sectors traditionally dominated by mom-and-pop shops.Isabella Falsetti/The Globe and Mail
Danny Parys runs a recruitment and human resources firm.
There is a cute term that people in the private equity world like to throw around: “dry powder.” Like gunpowder in a cannon awaiting a target, it denotes financial capital that is sitting in reserve and ready to be invested when the opportunity arises. Globally, PE dry powder is estimated to be worth more than US$2.5-trillion.
Another cute nickname that gets tossed around is “succession tsunami,” referring to the more than 70 per cent of Canadian small- and medium-sized business owners who plan to retire in the next decade, 91 per cent of whom have no succession plan.
What happens when dry powder meets a succession tsunami? I don’t have a cute nickname ready, but it will be a catastrophe for the nearly eight million Canadian workers employed by small- and medium-sized business.
PE companies are typically associated with more publicized acquisitions, such as the takeover of Toys “R” Us, or more recently, the Hudson’s Bay. In both instances private equity involvement led to assets being sold off, bankruptcy and thousands of employees losing their livelihoods. However, these firms are not content to simply gut the assets of our most cherished retailers.
Instead, PE firms have other tricks up their sleeves and have begun consolidating sectors traditionally dominated by mom-and-pop shops: from dentist offices to funeral homes to roofing companies.
Inside the corporate dash to buy up dentists’ offices, veterinary clinics and pharmacies
This strategy, known as a “roll-up,” entails a private equity firm buying multiple businesses, often in a fragmented market, to create a larger company. Ostensibly, this allows the PE firm to create economies of scale, improve profitability and ultimately prepare the consolidated firm for a sale at a higher valuation – often within a planned time frame of three to seven years.
In practice, this unlocked value often comes from squeezing workers. Hard.
Because PE firms tend to focus on large-scale, quick changes to boost profitability in the short-term, managers strive to get more for less.
Instead of long-term investments to improve processes, workers at PE-owned firms often report an increased emphasis on volume and a lack of focus on quality work to drive sales and increase productivity.
PE-owned firms are also more likely to undergo layoffs and often see sharp increases in attrition. For positions that do need to be replaced, many roles are advertised at a lower salary range.
According to the Centre for Economic Policy Research, wages for workers at firms that were bought out fell by an average of 10 per cent after one year, and 18 per cent after three years.
Unsurprisingly, lower pay, layoffs and higher workloads mean that companies purchased by PE firms tend to see a decline in employee sentiment toward company values, leadership and an overall reduction in morale.
The impacts of worker well-being are particularly worrying, given that in 2024, 42 per cent of Canadian workers already reported feeling burned out – an increase of 9 per cent from the year prior – according to research from consulting firm Robert Half.
So, why would any entrepreneur sell their business to a PE firm?
Because they’re good at buying companies.
PE firms have offices devoted to scouring the market looking for owners willing to sell, and often have streamlined transaction processes, deep pockets and attractive financial terms.
Although many owners want to protect their employees and keep the character of their organization intact, the sales process can be time consuming and difficult, particularly for entrepreneurs who are likely to be spending their time working in their business.
Finding non-PE buyers can also be a challenge and financing a sale is often a complicated process. Non-traditional business transfer methods, such as conversion to co-ops or employee ownership trusts, are unfamiliar to owners.
For many business owners looking to retire, selling to a PE firm often feels like the path of least resistance. But these attractive offers from large firms means that ambitious and caring employees are frozen out of ownership opportunities.
It’s already happening. Consolidation in the veterinary space means that many previously independently owned clinics are now owned or co-owned by one of just six corporations.
As mom-and-pop businesses are consolidated, the opportunity for ownership transition to employees will disappear. Those who know their clients, communities and organization best will find it harder and harder to also own the business they work in.
And without regulations to the private equity industry and improved succession options, employees will suffer.