Should I Sell to Private Equity?
Many Founders ask, should I sell to Private Equity? The answer, paradoxically, may have more to do with your goals than valuation...
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6 Secrets to Selling Your Business
If you’re the founder of a successful private company and you haven’t heard from a young associate at ‘XYZ Capital Partners’ telling you how this might be the perfect time to sell your company or take on a financial partner, then you’re in a small minority. Estimates suggest that there are more than $1.5 Trillion dollars of “dry powder” (committed, uninvested capital) in the coffers of these financial buyers, and some of it could conceivably end up in your bank account, endowing the rest of your life or funding your next adventure. But there’s a catch – you’ll hear plenty of cautionary tales about businesses like yours selling to private equity buyers and that may give you a reason for pause.
There is no real hard and fast rule about who you should sell to and whether a private equity buyer or a strategic buyer is better. However, if you’re a member of YPO, Vistage, or one of the other terrific CEO-peer-groups out there, your fellow members will have a viewpoint on which is better as if it were a binary decision. In most cases, the sentiment is more negative toward financial buyers, and sometimes that is because of the firm, and other times it’s a function of the structure, and in all cases, it’s highly dependent on the seller’s expectations. There are great, founder-friendly private equity firms that do none of the things your fellow founders would warn you against, and there are slash-and-burn strategic buyers who are diametrically opposed to the warm and inviting corporate homes described by your colleagues. Neither group is a monolith – important distinctions exist, and some prove the rule while others contradict it.
So, first, let’s start with WHY you’re contemplating a change of ownership, control, or capitalization of your business. Here’s a simple set of guidelines to drive your next decision(s):
Do you want to sell 100% and maximize the amount of cash at closing?
Private Equity probably isn’t right for your exit. But by being open to private equity, your transaction advisor can increase the universe of buyers, and potentially drive a much higher price for your business.
Are you open to continuing to work in the business and benefit from two sales (initial and “second bite of the apple”) and a new partner with financial, strategic, and possibly operating expertise?
Private Equity, in most cases, is ideal for this approach
Majority buyout firms will take control and might allow for you to step back, while still being involved, on payroll, and participating in big decisions
Growth capital (non-majority) firms may have more control than their equity stake would suggest but will often work closely with the founder/CEO to drive toward a higher sale with their help and capital. In many cases, the founder can take a modest amount of capital out of the business to diversify and de-risk initially, then build toward a future sale.
Do you want to continue, and your co-founder or partner wants to exit? Is your partner getting a divorce and neither of you has the capital available to buyout the leaving spouse, but you don’t want to sell the business?
Strategic buyers will want to buy the whole company, even if you stay involved, so they wouldn’t be the right solution for you and your partner.
Private equity, whether they’re majority investors or growth capital oriented, are often more creative with structure, and will strategize with you and your transaction advisor(s) to find a solution that may work for everyone involved.
Whether you should sell to private equity comes down to why you’re contemplating a change and which kind of buyer or partner’s approach is the best solution for those objectives. Once you’ve nailed down the WHY, it just comes down to running the right process to find solutions, and working toward the right mix of capital, chemistry, objectives, and time horizon.
