Business-Minded Legal Solutions

What to expect when selling your company to a private equity firm

There are pros and cons to selling your business to a private equity firm. The following is a quick breakdown of what to expect if you choose to go this route.

They often will not buy 100% of your business

To ensure a smooth transition, private equity firms often prefer that the existing owners keep skin in the game by retaining a percentage of ownership, for example 20-30%. Having the previous owners invested in the ongoing profitability helps avoid mishaps after the transition and calms investors about the company’s future prospects.

If your goal is to completely cash out of the business, you might instead consider courting strategic buyers looking to enter or expand into your market.

A due diligence marathon

After you sign a letter of intent with the private equity firm as well as all other material aspects of your business, they will want to see every scrap of paper detailing expenditures, profits and losses. The subtext here is they are looking for cracks and weaknesses that they can use to negotiate a lower purchase price. Steel yourself for this grueling stage, as it may or may not go quickly.

Be prepared to have a partner with high expectations

If your business continues to perform well after the acquisition, meeting expectations or exceeding them, the private equity firm may take a hands-off approach to the relationship. However, if your numbers do not meet expectations, your new owner may want a more active role in guiding the business. This can make you feel more like an employee than an owner.

The private equity firm stepping in is not necessarily bad news. Often these firms have experience running other businesses and their guidance may prove helpful. However, there is a chance their attempts to help will be a distraction at best and detrimental at worst.

To reduce the risk of unhelpful input, inquire about the firm’s previous business experience while considering its acquisition offer, talk with owners from their prior deals. If it is clear they are merely investors without deep business experience, you may want to reconsider the proposal.

More paperwork

A private equity firm will require quarterly and annual financial reports so that investors can monitor the health of the business. You probably produced similar reports before closing, but the firm may require more exhaustive information and additional documentation than you normally produce.

New fees

Some private equity firms charge management or board fees. These may be flat fees or a percentage of profits, but the fees are sometimes a shock to owners. If the firm is more hands-on, they may charge for services like financial analysis and even recruiting.

A firm’s involvement should be a demonstrable asset to the company’s growth. If you find you are not getting a satisfactory return on your fees, you should talk.

Benefits of selling to a private equity firm

As labor-intensive as it sounds, selling to a private equity firm can be hugely beneficial. Ideally, they should have experience growing companies and effectively applying their expertise to your business. It can also be a positive learning experience, equipping you with a more robust arsenal of business savvy going forward.

Enlist help

It is strongly recommended that you hire an experienced advisor before signing, who will protect your interests during this hectic and unfamiliar process.