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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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Selling Your Business

Companies are constantly being bought and sold; so regardless of what position you are in or what industry you service, selling your business is one of those topics you need to know about.

It’s a common misconception that the financial persons are overhead, are not valuable, and simply just count the numbers. But over the past 25 years, we have been converting those battling that stereotype into financial leaders. In the case of selling your business, a financial leader will do more than just put a nice price tag on the company, but transform it into a more profitable, more attractive company.

But why would someone want to sell their perfectly good company in the first place?

selling your business

Selling Your Business

For an entrepreneur, selling your business is either one of two things: an unwanted but necessary action OR an opportunity to move onto the next venture. There are several events that could cause someone to sell their company. Those might include retirement, relationship issues, an illness or death, or the inability to perform financially (resulting in bankruptcy). Conversely, those in the business to sell might be bored, wanting more innovation and excitement.

Any of these reasons are not wrong; however, it should be important to you to want to get the most value of of your company in the case of a acquisition or merger.

Wanting to sell your company? You need to access our free Top 10 Destroyers of Value whitepaper to make sure you don’t have any destroyers in your business impacting the value of your company! Click here to download.

How would sell your company?

There are a couple different ways that one could go about selling their company. The US Small Business Administration (SBA) argues that “If you have decided to get out of business and are not able to pass your business on, merge it with another business, or sell it as a going concern, liquidating the assets could be the most appropriate exit strategy.”

Liquidation is often used when your company is insolvent or unable to perform financially. This practice is often used to pay off any debt the company might have. Whenever a company is facing bankruptcy, debt restructuring is a vital part of the process to protect the debtors.

You could also sell off parts of the company, such as a practice, a product/service, talent. The reason why most companies would do this is because they have a product or service that doesn’t quite fit into their company. It’s the black sheep of the family! To create more of a synergistic entity, owners sell a part of the company or buy a part of another company. The goal of mergers and acquisitions to to bring more focus to the most profitable side of your business.

Or you could sell the entire company… Now there are two ways to sell the entire company: sell the assets (see above) or sell the stock. The later is more beneficial for the seller than the buyer. An article in the Wall Street Journal compared asset sales to stock sales and concluded that “Stock purchasers… are buying the company itself and thus are exposed to all of its potential problems.”

Valuing Business

Regardless of whether you are selling your business right now or not, it’s important to value your business. This just-in-case action will a) speed up the process if a buyer does come around, b) immediately add value to your company by addressing needs, and c) start the brainstorming session to improve your business. Valuing your business now will mean for a better future.

selling your business

Beware of Those Destroyers

As you are valuing your business, find those “destroyers” that greatly impact the value of your company and take steps to address them immediately. What is a destroyer? We have partnered with Professor of Entrepreneurship at Rice University Al Danto to identify what areas in a business that destroy the value of your company. (You can access his free whitepaper here.)

The two most common destroyers that we see with our clients starts with the leader and the consistency of revenue.

Start with yourself… Are you destroying your company? Something at The Strategic CFO that we’ve always said is that the fish rots from the head down. If the leader of the company is not leading well, manipulating the team, abusing its employees, not managing well, or getting involved in illegal practices, then the business will loose major value. Suppose you are in a situation where you feel you are destroying your company, where do you start? First, do a self assessment on yourself. Then, interview your team on what you can do to change. Finally, put everything you learned into practice. Continue to do these three steps until you see major change in the success of the company.

As a financial leader, it is also your responsibility to communicate the consistency (or inconsistency) of your company’s revenue stream(s). Honesty is key in the financial world. Are you consistent or inconsistent? If the company has inconsistent revenue streams, present solutions to your management team to develop consistency. Buyers are willing to take risks, but they will choose a company that has more consistent revenue than a company that does not.

If you want to learn about the top destroyers of value, click here to download the free Top 10 Destroyers of Value whitepaper.

Prepping Your Company for Sale

The best prep you can do when prepping your company for sale is to actually prepare. What does this mean exactly? Clean up the books. Tidy up any loose ends. Address any issues you feel a buyer would be turned off from. Reflect on past performance, then focus the company to be more attractive to any buyer.

In addition, start the process of valuing your business, improving cash flow, and maximizing profitability.

Value Your Business

There are different methods to value your business, but the most commonly used method is EBITDA valuation. Reach your industry to figure out the most commonly multiple of EBITDA used in mergers and acquisitions. Once, you pinpoint that multiple, plug it into the following formula: Enterprise Value = Multiple * EBITDA

What is your business worth?

Improve Cash Flow

Cash is king. You have probably heard that a million times throughout business school and in your career. That statement cannot be emphasized or repeated enough because without cash flow, there is no business. Prepping your company for sale includes unlocking cash in your business.

Maximize Profitability

How profitable is your company right now? Focus on maximizing the profitability of your company. If the focus of your entire team is to maximize profits and cash flow, great things will follow. If you’re in position to sell or just want to prepare for a potential sale, download the free Top 10 Destroyers of Value whitepaper to learn how to maximize your value.

selling your business, Valuing Business, Prepping Your Company for Sale

Strategic CFO Lab Member Extra

Access your Exit Strategy Checklist Execution Plan in SCFO Lab. The step-by-step plan to get the most value out of your company when you sell.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

selling your business, Valuing Business, Prepping Your Company for Sale

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