Selling a Business to private equity

Selling a Business to Private Equity

Selling your business to private equity can be intimidating, and plenty of factors must be considered. However, if done correctly, selling to private equity can help you unlock long-term financial returns and provide a secure future for the company. In this blog post, we will learn about the different stages of selling your business successfully to private equity investors and discuss some key strategies that can help guide you through the process. With the proper preparation and knowledge, you can make sure you get the most out of this critical decision with minimal hassle or stress. 

Understanding Private Equity Firms: How They Can Help Your Business Grow. 

Private equity firms are investment groups that aim to increase the value of businesses by improving their operations and expanding their reach through mergers and acquisitions. They generate revenue and increase profit margins by deploying cost-cutting measures and experienced management. Their ultimate goal is to make the business more valuable and sell it for a higher return.

If a private equity firm has approached you, they have determined your business could be a valuable asset in a long-term investment strategy. For example, they may want to combine your business with several regional firms to create a national brand that can be sold to a public company for a much higher valuation. 

While private equity firms may not be the right fit for every business owner, it’s essential to understand the pros and cons of selling to them. Based on my experience and conversations with other owners, this table summarizes what you need to know before deciding.

Selling a Business to a Private Equity Firm? Here are 5 Things to Keep in Mind:

  • Private Equity Group Level of Sophistication

While private equity groups (PEGs) may differ in experience, they are educated and knowledgeable about business acquisitions. Prepare and have clean financial books before entering a due diligence process. Some may prefer a proprietary deal, but experienced M&A advisors suggest avoiding these for better negotiating power and a competitive price.

  • Common Deal Structures with PEGs

Two famous deal structures with PEGs are majority recapitalization or a full buyout. With majority recaps, sellers can retain a minority interest and an equity stake in the business. It is essential to determine if your goals align with PEGs and if you want to sell your entire company or a portion of it.

  • The PEG’s View on Your Business

could be a platform or add-on to a PEG’s portfolio. Understanding this is crucial since it affects due diligence and how PEGs value your business.

  • Holding Periods

PEGs often hold businesses they acquire for 3-7 years, depending on their ROI goals. Knowing the average holding period of PEGs before doing a majority recap is essential.

  • Strategic Buyers

If the PEG already owns a platform company in your industry, it’s considered a strategic buyer. It changes the dynamics of the deal and requires you to report to two management teams, which may not be suitable for everyone.

By considering these factors, you can confidently negotiate and ensure the best outcome for your business.

Selling a Business to Private Equity: Weighing the Pros and Cons

  • The Pros: 

– Private equity firms offer a swift and structured approach to business acquisitions, enabling speedy deal-making. Their methodical long-term acquisition plan, coupled with investor accountability, means that once they have targeted a company, they waste no time in conducting minimal due diligence and sealing the deal.

– Aggressive and competitive in their operations, private equity firms adopt tactics that enhance business growth and create a more favorable landscape than an owner could foster independently. Additionally, private equity firms craft deals that structure stock in larger entities, giving owners the potential for a substantial payoff in the future.

– While selling to a private equity firm can undoubtedly lead to benefits, it is crucial to consider the potential drawbacks and carefully weigh the overall decision.

  • The Cons: 

– While selling to a Private Equity (PE) firm may offer advantages, there are also a few potential drawbacks. PE firms often take a risk-averse approach, resulting in lower offers for your business. Conversely, strategic buyers offer more based on “brand building” and other future-oriented goals.

– Another consideration is the heightened potential for conflict when partnering with a PE firm. Due to their desire to overhaul operations, clashes can arise when implementing new strategies.

– Lastly, some PE firms charge additional fees for management, recruiting, financial services, and HR management. It is worth noting that strategic buyers do not typically engage in these practices. Before deciding, it is essential to carefully examine all factors involved in selling to a PE firm.

Private Equity Deal Structures: Understanding Ownership Percentages. 

When selling to a private equity firm, it’s common for the firm to purchase 70-80% of the business. In contrast, the prior owners retain the remaining ownership. This is due to many private equity investors preferring the existing owners to reinvest some of their profits into the business – often referred to as a “rollover investment.”

Why is this important? By maintaining a stake in the business, the previous owners signal their confidence in its success, ultimately reducing risk and making the transition smoother. Some private equity firms will only consider a deal where the owners reinvest. While every firm has its definition of “meaningful,” it’s worth knowing the standard practices to make informed decisions regarding private equity investments.

What to Expect When Selling Your Business to Private Equity

When selling your business to a private equity firm, achieving your financial goals is the key to success. However, some business owners who have always been the boss might need help transitioning to a new partnership. To ensure a positive relationship with your new partner, it is crucial to hit your performance numbers.

But what happens if you miss your targets? Almost all private equity firms will want to “help” you get back on track. While this help can be beneficial, it can also become a distraction when you least need it. To avoid this, it is best to partner with private equity firms that have prior experience in operating businesses. They are more likely to provide constructive guidance based on their successes.

If you partner with investors solely focused on financial gains and without business experience, you might find their efforts more frustrating than helpful. So, when evaluating potential buyers for your business, inquire about their background and experience. Don’t hesitate to ask for references and to speak with prior owners who have worked with them.

In summary, partnering with the right private equity firm with a track record of success and experience in your industry can result in a positive and lucrative relationship for both parties.

Exploring Private Equity Investment Options for Your Business. 

Private equity firms scrutinize financial performance, growth prospects, debt, management, and brand reputation before diversifying their investment portfolios. Besides exploiting synergy opportunities among portfolio companies, these buyers facilitate similar business mergers.

Though private equity investors generally prefer private businesses, they consider public companies and may even take them private. Although larger firms appeal more to investors, smaller enterprises can benefit from private equity funding solutions.

Exploring the Pros of Selling Your Business To Private Equity. 

Business sellers have two options when considering a private equity investment: a complete or majority buyout. A full buyout entails the transfer of 100% of the business, assets included, to the investment firm, often resulting in a complete paradigm shift. However, the seller receives direct cash payment in exchange for the company – allowing them to retire or fund other ventures.

Alternatively, a majority buyout enables the private equity firm to purchase 70-80% of the business while keeping the current management in place. This option provides business owners with the opportunity to continue influencing daily operations, and they can optimize the private equity investment to achieve more excellent business value. Additionally, the “second bite” option allows sellers to sell their remaining shares later, usually at a higher price.

Private Equity Simplified: Understanding Debt Financing.

Most private equity firms use debt financing to complete an acquisition, sometimes called a “recapitalization.” It’s important to note that the amount of debt financing used can reach up to 50% of the purchase price, which has pros and cons.

Enhance Equity Returns. When private equity firms leverage debt financing, it reduces the investment required to complete a recapitalization. This means that if a business performs well, equity holders can see a positive effect on their returns.

For example, let’s say ABC Private Equity firm is recapitalizing XYZ Company, valued at $100 million. The firm requests that the owners of XYZ roll over 15% of their proceeds, or $15 million of the gross proceeds. ABC will use $40 million of debt financing to complete the capitalization, which leaves $60 million for the new equity investors. However, since the shareholders of XYZ are reinvesting $15 million of the $60 million, ABC only needs to invest $45 million.

The shareholders of XYZ still own 25% of the equity in the business, not 15%, and will take home $85 million in cash ($100 million less their rollover investment of $15 million). ABC will own the remaining 75% of the equity.

By understanding how debt financing works in private equity, investors can make strategic decisions to increase their returns and take advantage of the benefits of leveraging.

Need Help? 

With the reliable and proven strategies that People’s Equity Group offers, business owners now have a chance to sell their businesses to benefit financially from them effectively. People’s Equity Group provides access to institutional-quality deals and superior transparency throughout the process, allowing everyone involved to feel secure in their investments. By understanding all of these critical points, people can make sound decisions relating to their business with the help of the People’s Equity Group. As a result, they will be able to improve their financial situation and significantly reduce any risks associated with the sale of their businesses. Therefore we encourage business owners seeking out options for selling their business to reach out and take advantage of all that People’s Equity Group offers for maximum security and success! Let us prepare you for your journey with us via our excellent advisors – contact us today so we can explore your ideal solution together!