To some, the topic of selling to private equity groups does not stir positive feelings. Typical headlines tend only to cover ruthless, drama-laden, multi-billion-dollar mega buyouts, which has left a less-than-pleasant impression on most small to midsize business owners. Unfortunately, that is a real disservice. The reality is that for SMBs, acquisitions by private equity groups 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 PEG.
What is a Private Equity Group?
Private equity often gets lumped into a single category of leveraged buyouts, which has played a large role in the negative reputation of selling to a private equity group. 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 wish to sell their stake in the company. Or perhaps an owner wants 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 PEGs, see our deep-dive article on understanding private equity groups.)
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 select industries or sectors. This selective 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.
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 considering selling to a private equity group? It means that if you do not have a management team that 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 investors in private equity groups have been operators, or at least have worked alongside operators, in the relevant industry, so they can capably assist management with successfully executing key initiatives within the business.
Tailored Growth Strategies
While private equity groups are primarily investors, they are not just financial backers; they are strategic partners who bring tailored growth strategies to the table. They often have a history of successfully scaling businesses and can provide actionable insights into market trends, consumer behavior, and operational efficiencies. This tailored approach to growth can lead to more sustainable and profitable business models, which is especially beneficial for SMBs that may lack the resources or knowledge to develop such strategies independently.
Access to a Broader Network
Selling to a private equity group can open doors to a broader network of industry contacts, potential clients, and partners. These groups usually have an extensive network of relationships across various sectors, which can be invaluable for business expansion, finding new market opportunities, and forging strategic partnerships. This extended network can significantly accelerate business growth, which might otherwise take more time to achieve.
Focus on Sustainable Practices
Many modern private equity groups focus on Environmental, Social, and Governance (ESG) factors in their investments. Partnering with such a group can help your business adopt sustainable practices, which is increasingly valuable in today’s market, where consumers and clients are more environmentally and socially conscious. This shift can improve your company’s operational efficiency and enhance its public image and brand appeal.
Professional Development Opportunities for Employees
Transitioning to private equity ownership often comes with enhanced employee training and professional development opportunities. This effort is because private equity groups typically invest in the businesses they acquire, not just financially but also in terms of human capital. Such investments can lead to a more skilled and motivated workforce, which is critical for the long-term success of any business.
Entrepreneurial Risk Mitigation
For business owners, selling to a private equity group can help mitigate personal financial risk. By diversifying personal wealth and reducing the reliance on a single business’s success, owners can achieve a more secure financial future. This aspect particularly appeals to entrepreneurs who have invested a significant portion of their lives and finances into a business.
Long-Term Growth & ROI
With private equity buyers, your business can explore lucrative opportunities it may not otherwise have access to. These opportunities include expanding manufacturing or distribution capabilities, entering new end markets, geographic expansion, improving systems and logistics, and other strategic possibilities. A private equity group may pursue growth through buy-side M&A, meaning selective and highly strategic 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 company’s long-term goals.
The option of selling to private equity groups certainly involves looking for the best price, but it also involves weighing long-term benefits. The ultimate goal of private equity groups (and selling to private equity groups) is to expand and grow the company’s profitably. Remember, there is the benefit from the initial sale and the proceeds from the eventual sale of the rollover investor’s remaining equity.
To achieve these benefits, evaluate the private equity group’s industry expertise and determine if that experience is relevant and will add value to your company’s business. Additionally, assess the private equity group’s operational expertise in areas pertinent to your business, and evaluate whether the group’s experience, resources, and strategic relationships will support your company’s growth strategy. If you anticipate add-on acquisitions, be sure to evaluate the private equity group’s expertise and success in acquiring 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 nearly three decades of experience in the buying and selling of businesses, including selling to private equity groups. We help identify private equity investors with experience and connections relevant to your company, and we can help ensure alignment between the investors and your management team in their vision for the future growth of 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.