Selling to Private Equity: Do Your Due Diligence
Despite many of the challenges of the pandemic, there’s still a lot of investor money looking for solid and smart investments. Some of that money is sitting in the pockets of private equity firms, and those firms are increasingly looking at smaller deals to fill out their portfolio of investments. Private equity (PE) firms present an interesting opportunity to sellers and those preparing their businesses for sale should take a bit of time to understand what PEs are and how to prepare for offers they may make.
What Private Equity Can Offer
While PE has the reputation for buying underperforming companies and then re-engineering their financial, managerial, and operational structures before ruthlessly flipping them, that’s not usually the attitude they bring to smaller, Main Street businesses.
If a Main Street business offers solid growth potential and has a strong team in place, PE can accelerate that success:
- They have access to capital as needed
- They can utilize economies of scale (leveraging certain services they may offer to every company in their portfolio)
- Creating strategic partnerships (this can be with other companies in the portfolio or through their own connections)
Do Your Diligence
Don’t let the term “private equity” intimidate you. They are just people trying to find a better-than-average return on their investments. They will definitely do their homework on your business. But you should be doing the same to them, particularly if you are going to stay on in the business after the transaction or care what happens to your employees if you are slated to leave.
Questions to Ask
The first question you might ask is “What’s your strategy for our industry?” Follow this up with “Why are you attracted to the industry?” and “Where do you see our business going?” These are short questions but they should lead to long conversations, particularly if the PE has a strategy and isn’t just looking to spend their dry powder.
You can also also ask the expected questions, like:
- Can you introduce us to new markets? New suppliers?
- Can you help us develop new products/services?
- Are there any related companies in your portfolio that we might have synergies with?
Don’t be blinded by the references they might make to how much money they have under management. What do they bring to the table for your business and your industry?
People to Talk To
You are going to want to call their references. For PE this would be current and former companies under management. If they are willing to let you talk to them, you should also talk to those whose deals didn’t get to the finish line or owners who exited sooner than planned. Also speak to members of corporate boards which the PE has ties to.
A PE, just like your business, isn’t just a balance sheet and a profit and loss statement. They have a culture, a way of doing things. That way of doing things should align with your company’s culture as well. A PE may want to buy your company outright, or they may offer you a chance to leave some skin in the game to take the company to the next level and have a second exit. Or they may just want to make a small investment now and see how things go. Be open to different structures and possibilities.
Private equity groups and family offices are just one of the many qualified buyers that our brokers keep in touch with on a regular basis. We introduce qualified buyers to our new listings each week. If you’d like to be one of those listings, give us a call so we can see if we’re a good fit for each other.
