Tag Archives | private equity investors

Selling Your Business to a Private Equity Group

Private Equity companies are companies that have raised capital from investors and they have created funds. Each fund may have its own legal mandate. These are common examples of mandates:

  • Invests only in oil and gas companies
  • Is agnostic to what industry it invests in
  • Invests only in companies it controls

Private Equity companies come in many different colors and flavors.

They can be a very good resource for capital when an owner is looking to exit, or partially exit (“take some money off of the table”).

Oftentimes, entrepreneurs or founders (the seller) never thought of or did not know that Private Equity was an alternative; thus, I wanted to cover how selling your business to a private equity group may be a good option for you in this Blog.

Private Equity as a Buyer

Private Equity firms (“PE”) can be a very good alternative and buyer for your business.

They have liquidity…

They have talented financial and operational professionals on staff…

And they can usually get a deal/transaction completed in a very reasonable period of time.

Most PE will not waste your time.

They will tell you up front after one or two meetings if they are a “real” buyer.

In the past year, I saw some statistics that quoted that there is nearly one trillion dollars in PE dollars on the sidelines ready to invest. That is an incredible amount of money ready to invest.

But this is what you need to know if you are thinking about selling your business to a private equity group. This is critical and can make your life pleasant or miserable.

Once you find the PE firm that is purchasing your company, most likely they are purchasing the majority of the equity in the business and they are purchasing a controlling interest.

As an entrepreneur, founder, and business owner, you have lived in your company for many years.

You have enjoyed a comfortable life style…

You have the management reports that you need and you felt were enough…

And you have set your own agenda.

Most importantly, you do not answer to anyone!

LIFE IS GOOD.

If you are selling your business to a private equity group, then consider getting rid of any destroyers in your business that may be destroying value. Download the Top 10 Destroyers of Value to learn what those destroyers are and how to get rid of them.

Stages of a Private Equity Relationship

In my 30 plus years of experience, these are the stages of a private equity relationship that I have observed for some entrepreneurs. It’s a lot like marriage!

Dating Stage

The private equity firm approaches you and your business. There are some really nice dinners, great friendly meetings. There are multiple tours of your business. People understand each other. Everything looks like this is a great fit!

Engagement Stage

After many visits, conference calls, and review of some basic company and financial information, you sign the Letter of Intent “LOI”. You find your self engaged to the PE firm.

It’s all good.

There is a big prize on the horizon, and you can’t wait for the deal to close.

This stage might last between 60 days to 6 months.

Married Stage

The deal has closed! Yeah, it’s all good…

The cash has hit your bank account for your 70% of the business, and you still maintain 30% of the business. The PE group has promised a great relationship and lots of capital if you ever need it for growth.

Wow!

From now on, you can only double your money. Life is still good!

But now… You get the first request to deliver a monthly reporting package on a timely basis.

That means that you – the CEO of a company you own 30% of – must deliver on the 10th day of the following month a report to the PE group. You better have good numbers, and you better explain any variances to the penny.

Remember, you are dealing with very smart, analytical professionals that can smell BS a mile away.

So, BS will not cut it.

Month 3, 4, and 5 have now passed…

You have had many Board meetings where you are now the subject of interrogation. You have to come up with answers to variance from budget, but you sometimes cannot explain them because for the last 20 years, you have run the business based on a gut feeling and it has worked.

Now, you have a room of MBAs in their 30s asking you questions.

Stress starts to build.

Month 6, 7, and 8…

Yikes! You hate the thought of the next Board meeting.

You are starting to question the relationship you have with the PE firm. Those great expensive dinners during the dating stage are meaningless.

What have you done?

You are not enjoying going to work every day.

As a matter of fact, you now have to take calls on weekends and get permission to take a vacation!

Divorce

Finally, we reach the last stage…

One or two years have passed since the close of the transaction. You have had countless Board meetings, and you have suffered though all the interrogation. They have treated you like a kid and someone thirty years younger than you who is new to the business is telling you how to run “your business”.

The company you built.

You now only own 30%.

And you want out…

Reality

Selling to a PE firm is still a great option. In the U.S., PE firms have a lot of liquidity and can get a deal done. They can afford to pay you a reasonable price for your business, or part of your business.

There is nothing wrong with any of that.

What is wrong is that the business owner, founder, and/or seller does not understand what the requirements are after the sale process.

Requirements After Selling Your Business to a Private Equity Group

So, what is required after selling your business to a private equity group?

  • Professional environment
  • Detailed, reliable, timely financial statements
  • Board meetings where you (the seller) provide answers to questions and any variances
  • You as the CEO with now only 30% will be held accountable to respond to the PE group that as the majority owner
  • The CEO will be questioned and interrogated by the controlling owners of the business
  • You can not take off and head to the ranch on Thursday… You need to behave as a responsible EMPLOYEE of the business
  • Be humble
  • Your _ _ _ is on the line to respond to the owners that now control your business.
  • You sold your business. You are an employee.  Most likely, you have never been an employee.
  • If you can honestly accept this new role, you will be fine. If you think you still call the shots after the closing of the transaction, you will be hating life.

Selling to PE Firms can be a wonderful experience if you know what is on the other side and if you are willing to take on a new role, one as an employee.

If you are not open to being the employee that answers questions and will be held accountable, then pause and consider what it takes to sell to a PE Group.

If you are considering selling your business to a private equity group, then first see if there are any “destroyers” in your business that may be taking value away. Read through our free Top 10 Destroyers of Value whitepaper to learn more.

Selling Your Business to a Private Equity Group

Selling Your Business to a Private Equity Group

 

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3 Myths about Private Equity Investors

traditional financingMyths about private equity can inhibit entrepreneurs from pursuing business opportunities and making rational decisions.  Private equity financing is a complex decision for business owners.  These owners should analyze other financing options and goals for future growth of the company before making important investment decisions.

3 Myths about Private Equity Investors

Here are three myths about private equity investors

1.  Private equity investors take advantage of business owners.

Private equity is not intended to be a win for the investor and a loss for the business owner. The investor’s best interest is that the entrepreneur grows the business and increases its value so that BOTH sides win.  Private equity investors are not profitable if the value of the company depreciates.

Many business owners perceive private equity investors as greedy and manipulative in cutting them out of the success of their companies.  However, most of the time these perceptions arise when entrepreneurs:

  • Lose control
  • Blame private equity investors for the demise of their companies

As long as you leave at least half of the company in your ownership, as an entrepreneur, you will have control over your company to make important strategic decisions. Most private equity investors don’t want to run your company or take advantage of you. Instead, they just want to contribute to your business’s success. 

2.  Private equity investors do not add value beyond their monetary investments.

While many people view private equity investors solely as sources of capital, this misconception is untrue. Most investors have expertise and experience in the various industries. Many experience come from past investments in successful companies and others from being entrepreneurs and chief officers themselves.  They have the know-how to advise businesses from an impartial outlook and to add value by bringing in fresh ideas and perspectives.

Investors also have a network of connections to help companies advance and develop strategic partnerships. An investor with a good understanding of the company that he or she invests in will do more than just invest money into a business. They will help grow the company’s value in a rational and sustainable approach.

3.  Once a private equity investor is ready to exit his or her investment, the business owner has to sell the company or take it public.

Business owners are not forced to sell their companies or take them public once a private equity investor decides to exit.  Private equity firms usually invest in companies with a goal of exiting within five to eight years. The private equity firm’s partners expect liquidity at a certain point in time. As a result, the firm cannot hold on to all investments forever. At this point, the business owner has several choices, including raising capital from a new private equity investor or a new partner

Avoiding these common misconceptions will allow you to focus on the positive benefits. Therefore, you can make better decisions about private equity investments.

Learn how to apply concepts like this in your career with CFO Coaching.  Learn More

Myths about Private Equity Investors

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