To some, the topic of selling to private equity groups does not stir positive feelings. It is true that typical headlines tend to only cover ruthless, drama laden, multi-billion-dollar mega buyouts. This has left a less-than-pleasant impression on most small to midsize business owners, and that is unfortunately a real disservice. The reality is that for midsize, and even small, midsize businesses, these are not the predatory transactions you’ve heard about, and there can be significant benefits to selling part or all of your company ownership to a private equity group.
What is a Private Equity Group?
Private equity is often lumped into a single category of leveraged buyouts, which has played a large role in the negative reputation. In reality, private equity encompasses a wide variety of transactions from minority buy-in to majority buyout to complete transfer of ownership.
For example, an owner may be approaching retirement and wants to sell their stake in the company. Or perhaps an owner simply wishes to diversify their portfolio so that their net worth is not tied to a single business.
Another common scenario is an owner who wishes to remain a partial investor in the company while stepping out of their operational role. These owners sell controlling ownership to a private equity group and become “rollover investors.”
(For a more detailed look at what private equity groups are, see this article.)
Benefits of Selling to a Private Equity Group
Private equity groups are professional investors with a wealth of experience in operating businesses. That means, when selling to a private equity firm or group, their investment capital comes with the expertise of owning and operating other companies. Additionally, many of those other companies are likely in the same sector.
Private equity groups often focus their investments on a few select industries or sectors. This selected focus results in a valuable depth of industry expertise and knowledge of the relevant customers and competitors, suppliers and systems, products and processes, that drive those industries. So, although private equity groups are decidedly investors, not business operators, their expertise translates to sound guidance and growth for the company.
To see this benefit, be sure to evaluate the private equity group’s industry expertise and determine if that experience is relevant and will add value to your company’s business.
Partnering Toward Optimization
It is important to understand that while private equity groups have a wealth of experience in operating businesses, they are not in the business of running companies; as mentioned above, they are professional investors. What does that mean for an owner wishing to sell to a private equity group? It means that if you do not have a management team in place who can fill your shoes, you must either build that team or partner with a private equity group for an extended transition.
Then, with its extensive industry expertise, the private equity group partners with the management team to improve, optimize, and scale the business. Remember, many of the investors in the private equity groups have been operators, or at least have worked alongside operators, in the relevant industry, so they can capably assist management with the successful execution of key initiatives within the business.
To see this benefit, be sure to assess the private equity group’s operational expertise in areas relevant to your business, and evaluate whether the group’s experience, resources, and strategic relationships will support the growth strategy of your company.
Long Term Growth & ROI
The option of selling to private equity groups certainly involves looking for the best price, but it also involves weighing long-term benefits. Remember, there is the benefit from the initial sale, but also the proceeds from the eventual sale of the rollover investor’s remaining equity.
With private equity buyers, your business can explore lucrative opportunities it may not otherwise have access to. This may include expanding manufacturing or distribution capabilities, entry into new end markets, geographic expansion, improving systems and logistics, or any number of strategic possibilities.
Another growth opportunity that private equity groups may pursue is growth through buy-side M&A, meaning selective and highly strategic add-on acquisitions. The ultimate goal of private equity groups (and of selling to private equity groups) is to expand and grow the company’s profitably, and one way to do that is through add-on acquisitions. These add-ons may be in three areas:
- same or adjacent industries or sectors
- complementary areas
- areas where an element of the add-on business is needed to further the long-term goals of the company.
In order to see this benefit, if add-on acquisitions are anticipated, be sure to evaluate the private equity group’s experience and success in acquiring these types of add-ons, including the successful subsequent integration (or not) of those acquisitions into the original business.
In the right circumstances, there are clear advantages to selling to a private equity group. The key to experiencing those benefits lies in identifying the private equity buyer that will provide the owner(s) with the opportunity for the highest overall proceeds. That will not necessarily be the buyer who offers the highest sale price for the company today. Remember, there are two sales to consider: the initial sale to the private equity group and the future sale when the private equity group sells its and the rollover investors’ remaining stake in the business at a future exit.
At Viking, we have over 25 years’ experience in the buying and selling of businesses, including selling to private equity groups. We help sellers identify private equity investors with experience and connections that are relevant to your company, and we can help ensure that the investors and your management team are aligned in their vision for future growth for the business. If you would like to discuss the idea of selling to a private equity group, reach out to us. We are here to help.