DiscoveredLOGIC, LLC

Management Consulting & Training


7 Things to Consider when Private Equity Is Interested in Your Business

Posted on August 16, 2019 at 1:55 PM

If you are a successful business owner, you may already have received a call from a private equity group interested in acquiring your business. Globally, private equity firms invested $582 billion in deals in 2018 ... but are still sitting on a record high of $2 trillion of capital waiting to be invested, according to Bain & Company's Global Private Equity Report 2019. Competition among private equity groups to find acquisitions can be intense. For example, the number of firms looking to buy ophthalmologist (eye doctor) medical practices in the USA has grown from just one in 2012 to twenty in 2018, according to Ophthalmology Times.

Getting a call from a private equity group can be exciting - a sign that you have built a business that is large enough to be on their radar. It can also be intimidating. Private equity folks are deal-making professionals who often come from elite investment banking and management consulting backgrounds. They buy and sell businesses for a living. Your business is your living - you built it and it is the only one you have.

Here are 7 things to consider to prepare for talks with private equity firms.

1 - What Are Your Goals? - Are you looking to cash out and retire? Do you want to keep working? Are you willing to work for a demanding new boss in exchange for a potential big payday? Do you have business partners or successors you want to transition to? It is important to think about how your business fits in your broader life goals. Speaking with a certified financial planner can be a good idea to understand the financial part of those decisions. Speaking with an executive coach can be helpful to explore your career goals.

2 - Know Your Numbers - A big determinant of the value of your business will be a number derived from your financial statements called EBITDA - Earnings Before Interest, Taxes, Depreciation, and Amortization. It measures your company's underlying profitability once you strip out your tax, accounting, and capitalization situation. Any investor will want to scour your financial records to understand your history and projections. It is important to work with your company's financial staff to understand what your financials look like and have confidence in their accuracy and thoroughness. A private equity buyer is probably going to try to poke holes in those numbers during the due diligence process to confirm or adjust their valuation of your business. Finding a business valuation service provider or a business broker to give you an independent sense of your company's value could be helpful.

3 - Private Equity Is Not Your Only Option - If selling your business sounds appealing, private equity firms are not the only buyers out there. Other non-financial companies that create similar products or services as you do might want to buy your firm to add to theirs. If they buy your company, they may want to become your boss or have you exit the company. Like private equity firms, they typically will set a price for your business based on its current EBITDA times a multiple of that number that they have seen in the market. (To use a home-buying analogy, this is kind of like looking at the price per square foot of other houses recently sold in your market to come up with a value for your house.) Getting advice from a business broker can be helpful to find these opportunities and multiple value ranges relevant to you.

4 - You're Not The Private Equity Firm's Only Option - Private equity groups look for potential acquisitions all the time. They build a pipeline of potential acquisitions and know that only a small fraction of those will turn into a deal they find worth making. If you or your staff are too hard to work with, they may have plenty of other options on their list to pursue. Ensure you and your staff treat private equity firm staff with the professional courtesy the situation commands. After all, they may become controlling members of your board of directors.

5 - Anticipate the Deal to Be Offered - Private equity firms can buy all of your business or can offer to buy a large controlling majority (e.g., 70 percent) of your business and have you keep the remainder and stay to manage operations. That way you have an incentive to rapidly grow the value of the business. They may finance a big part of their equity purchase by taking on debt that they put on the company's books. Within a few years (often 2-7 years), the private equity company will want to sell the company because they have to pay back their own investors. The plan is that the operational improvements (and financial restructuring) completed will translate to increased EBITDA, which will make the business more valuable than when they bought it. (To continue the home buying analogy, private equity firms are a bit like people who buy houses using money they have and borrow, then invest more money, effort, and time to fix them up, and then profit by selling them for a higher price later.)

6 - Anticipate the Improvement Opportunities - Your new private equity owners are probably going to want management to generate more revenue by growing sales from existing customers (and sales agents), finding new customers and products/services, and optimizing prices. They are probably going to look to reduce costs across the board, including cutting staff, eliminating inefficiencies, squeezing suppliers, and chopping overhead. They are likely to look for assets that can be sold off. Things that may have been "sacred cows" -- like family members on the payroll, cushy benefits, club memberships, company cars -- will likely get scrutiny. They may also want to merge other companies into yours or merge yours into another company - a strategy sometimes called "tucking in." If you stay on to manage the company under a private equity controlled board, you are going to be the one who has to make these changes happen. (To continue the real estate analogy, it's a bit like continuing to live in a house you sold while you lead the improvement work to ready the house for resale.) Do you have the appetite to drive these types of changes? An executive coach can help you talk through that question.

7 - Prepare for the Process - If you decide to move forward with a private equity suitor, gird yourself for the steps between an initial meeting and a deal. The initial meeting with pleasantries and a tour will give way to a due diligence process that may feel like an audit. It can take up a lot of the time and focus of you and your management team, especially your financial staff. (Consider getting a non-disclosure agreement before sharing your information.) They may talk to your customers, employees, suppliers, and business partners to see how the information from you checks out. They may review your current and prospective competition. They may assess the potential impact of technology, regulation and other external forces on your business. (If your business has "any skeletons in your closet," they may come out too.) Each flaw discovered may chip down the price of your business initially agreed to in a letter of intent or may stop the deal altogether.

When done right, a sale to a private equity firm can be a way for a business owner to exit their business while also keeping the business going.Some business owners who stay call it "getting two bites at the apple" because they get paid when they sell their initial stake to the private equity firm, and they get paid again -- potentially even more -- when the private equity firm sells the transformed business. A little preparation can help make sure that apple tastes more sweet than sour.

Categories: Private Equity, Career Planning, Negotiations