Should You Sell to a Private Equity Group?

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Private equity groups (PEGs) are always looking for good businesses to buy – ones that are ready to grow. They seek businesses that are successful but need an infusion of capital, expertise, scale or marketing to reach their full potential.

Often, PEGs will purchase a large percentage of the business and ask the owner to maintain some ownership and stay involved in running the business. They’ll then seek to grow the business and possibly sell it again.

The Pros: Growth, Two Paydays, Gradual Separation

privateequityThat scenario sets you up for two paydays – one at the initial sale and another after you’ve grown and the private equity group either sells the business again or buys you out at a much higher value!

That’s just one of many benefits when selling to a PEG. It may be right for you if your business is successful but stagnant – if you’re looking for help taking it to the next level.

These buyers are good at what they do; they likely have other businesses like yours. Because they typically don’t want to get into the weeds, they often want you to continue leading for a time, while they add oversight and assistance in the areas where you’re lacking.

The Cons: No Pricing Premium, More Thorough Examination, Potential Cost Cutting
In our experience, private equity investors are tough negotiators. However, they will offer a fair price, rarely paying a premium. They will require more time consuming due diligence – typically 90 days. They are in no hurry; they’ll look at 500 potential deals before choosing one. So they won’t hesitate to put you through your paces.

To fund growth, these groups may require the business to do some cost cutting, layoffs, and other changes, which could make you uncomfortable. This is especially true if they own other businesses like yours and are looking for synergies.

Be Prepared

  • If you think your business may be attractive to a private equity group and you’re interested in selling, do some prep work (check out our post 6 Critical Factors That Make Businesses More (or Less) Attractive to Buyers). Talk with an advisor to understand your strengths and weaknesses.
  • If you attract interest early on, don’t get greedy and assume you’ve set your price too low. You may not get a second group interested.
  • As you begin negotiations, make yourself available, and work on building a relationship with the potential buyers. You’re likely to be working with them for some time, so you’ll benefit by getting off to a good start.

If you or someone you know is interested in buying or selling a business, please call us at 913-383-2671 or contact one of our Apex Business Advisors today!

It Pays to be Thorough with Due Diligence

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paul-temmePost by Paul Temme, Certified M&A Professional (CM&AP), Apex Senior Advisor

If you’ve found an attractive business to buy….CONGRATULATIONS!

Knowing the kind of business that interests you and matches your strengths is one of the hardest and most important first steps. Once you’ve expressed an interest and begun the conversation, it’s time to put your plans in place for digging into the business and making sure you know what you’re getting. That’s called due diligence. And it’s wise to prepare for it in advance.

Understand Your Business Advisor’s Role
As business advisors, we typically represent the seller. While we want to see both parties benefit from a fair deal, our role is primarily to convey information between both parties. Early in the discussion process, we will share the seller’s profit and loss statement and balance sheet. And we will confirm with you that they jive with the seller’s tax return.

Basically, if the seller says he has $1 million in revenue and $250,000 in profit, it should show on the IRS filings. But it’s important to note that we don’t audit the seller’s financial statements or confirm their validity. That’s up to you.

Consider Hiring an Accountant
Once you have a settled offer on the table, it’s your responsibility to execute whatever due diligence you think is needed. Typically, that means confirming the accuracy of the financial statements. The seller is required to open the books, including checking account statements, credit card statements, benefits information, insurance bills and more.

duediligenceUnless you have a strong background in accounting, you should probably engage an accountant to review the seller’s disclosure statement and books and compare them with the IRS filings. At the least, you should have a professional direct you in your review.

We once had a $4 million deal that was in jeopardy because the buyer – an experienced sales person – was having trouble understanding the seller’s financials and the large tax implications for the seller of the business.

He ended up hiring an accountant who worked with the seller’s tax attorney to structure a deal to benefit both sides. Five years later, he’s still going strong.

There’s a Buyer for Every Good Business
It’s important to know whether your business advisor is representing the seller or the buyer. Regardless of whom we represent, it’s important to us at Apex that buyers understand we are here to help them by conveying information – including helping them find the other advisors (accountants, attorneys, etc.) they need.

We want happy buyers and sellers who come back to us when it’s time to buy or sell in the future. And if the deal doesn’t work out for you, that’s OK. If one business doesn’t work out, another good match will come forward.

If you or someone you know is interested in buying or selling a business, please call us at 913-383-2671 or contact one of our Apex Business Advisors today!