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Selling Your Business? Private Equity may be an option. We’ll explain.

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Author, Insider 94 Staff

Selling your business comes with many options to consider. Among the most important is selecting from the arena of potential buyers; you could sell to family, friends, an entrepreneur, employees, or a competitor. Within this arena is a subset of buyers with much more to offer than merely a traditional sale. Say hello to Private Equity Groups.

Selling a business to a Private Equity Group can be a complex process, but it can also provide an owner with a great exit opportunity. A PE Group can maximize the value of your business and ensure a smooth transition for your employees and customers. They have the financial resources and expertise to help you realizethe full value of your business and provide additional capital to help you grow and expand your business, with strategic guidance to help you reach new heights. Plus, they provide the assurance that your business will be taken care of and managed properly in the future.

Whether you’ve already had interest from a PE group, or you are just weighing your options, understanding what to expect with this type of sale, the process, and its do’s and don’ts is imperative. So, let’s take a deeper dive.

Exactly what is a Private Equity Group and what motivates them?

A PE Group is a firm that invests in established, private companies with successful finance track records and strong valuations. These groups can be funded with pools of private investors (like pensions), endowments, insurance companies, family offices or other personal wealth funds. Sometimes, a PE investment is funded by a leveraged buyout, using debt to finance an acquisition.

A PE Firm will drive growth by providing capital, strategic direction, and operational support, making a company profitable in a short period of time, typically 3-5 years. Private equity groups typically acquire a majority of a company’s shares, either through a purchase or a merger. They then often become the majority shareholder and take a more active role in the management of the company. PE investors will invest in multiple businesses, often in multiple industries, with the goal of increasing the revenue of their portfolio companies and ultimately sell them for a profit to another PE firm or through an IPO (initial public offering).

PE investors buyout owners and revamp the business model to increase growth that will result in a profitable sale. This process, called recapitalization, involves streamlining operations, restructuring human capital, improving products, enhancing services, and establishing market differentiation to increase the valuation in preparation for the inevitable sale of the business. Private equity groups make 15%-20% of the final sale price of the business that they have invested in and revamped. And because interest payments are tax deductible, the carried interest enables the firm to make a profit regardless. However, a profitable sale is still the end game and developing an exit strategy that optimizes the company’s value will increase profitability, reducing the potentially undesirable components of some buyouts (such as job losses) and serving as an incentive to business owners.

What is involved in selling a company to a Private Equity Group?

There are two possible scenarios when selling to a PE firm. A full buyout or a majority buyout. In a full buyout, the private equity firm takes complete control of the business, typically resulting in a full leadership change and alterations to the business operations, staff, and strategy. The primary benefit of this type of transaction for the seller is the full payment for the company, allowing for retirement or pursuit of other endeavors.

More often, private equity firms purchase a majority, 70%-80% of the business, while maintaining the current management team. This allows the owners to stay involved in the company for a period of time and benefit from the private equity funding for recapitalization. It also enables the business owner to maximize thevalue of their private equity investment by continuing to influence the company’s products, operations, and strategy, allowing them to sell their remaining shares at a higher price at a later date (aka a “second bite’).

Once a PE firm is interested in a business, they will conduct due diligence on the company, typically divided into four stages:

1 Preliminary: The PE group will evaluate the company’s past performance and financial condition, as well as the industry environment in which it operates. They will also review of the business’s legal and regulatory compliance and its operations.

2 Financial and Operational: At this stage, the private equity group will review the company’s financial statements, including balance sheets, income statements, and cash flow statements. They will also assess the company’s operations, including its management and customer base.

3 Valuation Analysis: The private equity group will conduct a detailed analysis of the company’s financial and operational performance to determine a fair market value for the business.

4 Negotiation and Closing: The private equity group will negotiate a purchase agreement with the seller and ensure the deal is structured properly. Following the completion of due diligence, the private equity group will close the deal and become the new owners of the business. Depending on the terms of the sale, they will take control of the business and begin recapitalization and may make additional investments in the business to fund growth initiatives or improvements.

Prior to selling to a PE firm, consider researching its history, current clients, industry specialization, and deal structure to determine if they are a strategic partner that is likely to invest over a longer period of time, or if it is a short-term, opportunistic sale that is focused more on PE profit than long-term value. While many PE firms prioritize investing for growth and success with involvements in all areas, some are known for making drastic cuts, charging high fees, and setting unreasonable objectives. For big companies, private equity is often associated with the division and sale of various parts of the business, which can have a negative effect on the seller.

Here are some Do’s and Don’ts for selling to a Private Equity Group:

With careful consideration and due diligence, the acquisition of a business by a private equity firm can be a win-win situation that brings financial stability to the business and provides a new platform for growth. The private equity firm will bring the necessary capital, resources, and expertise to ensure the business’s success, enabling the current owner to monetize their investment and benefit from the new opportunities that the PE firm brings. There is power in private equity and its ability to create value for all involved.

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