Business-Minded Legal Solutions

Selling a business to a private equity firm

Owners sell businesses for a multitude of reasons. Some may be approaching retirement age, partners may want to remain partial investors but relinquish some managerial duties, or the company needs a capital infusion to stimulate profits and expansion.

The traditional approach is finding a strategic buyer because they typically pay the most money. These are usually larger businesses that are in the same industry, or they might be in a different sector and want to expand in your market or area of expertise.

But more entrepreneurs are finding that private equity (PE) firms are an attractive option. PE companies raise money from high-net-worth individuals, endowments, insurance companies and other sources and invest in other businesses.

The stages of selling to a PE firm

Private equity companies can be a good fit for business owners who want to maximize liquidity and maintain an equity stake or even operational control. While PE firms occasionally seek 100% ownership, they may purchase 70% or 80% of a business, with existing owners retaining the other 20% or 30%. Here are the typical stages of a sale:

  1. Initial offer: If a PE firm is interested in your company, you will receive a letter of intent (LOI). The initial offer is based on the company’s enterprise value. The LOI should contain terms for payment including any rollover equity or earnout payments, conditions to closing and other high level deal points. Considerable negotiation is often done at the LOI stage.
  2. Due diligence: Once you agree to the terms, the PE firm will bring in its lawyers and other experts to assess many aspects of your business. Expect them to request records for financials, business dealings, contracts, IP, litigation and more. They will look for ways to negotiate a lower price. This step normally takes two to six months.
  3. Closing: Once due diligence concludes and a purchase agreement is negotiated, the deal closes, and you receive the closing proceeds.  Some amounts will be held back or escrowed, and you may be required to roll over some portion of the purchase price into a continued equity position. The PE firm may offer you an ongoing role as an employee or consultant. However, understand that they will hold you accountable for their expectations as you are no longer the autonomous owner. They may also dictate cultural and other changes to the business.

Private equity firms are a common exit strategy for business owners looking to sell a middle market business. PE firms often offer an opportunity to receive a fair price for your company. But it is crucial to understand how they work and get expert legal advice before beginning a sale process.

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