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Working with Private Equity Groups when Selling your Business

Posted by John Fairchild in Articles

Because private equity groups operate in a large swath of the middle market, these groups have a great deal of buying power, which reflects a high volume of acquisitions in the M&A marketplace. They have access to capital, use technology and know-how efficiently, and strive for strategic growth and return on equity. There are over 3,300 private equity groups in the United States and there are over 11,000 private equity-backed companies headquartered in the U.S. If a business owner is looking to exit her business, Private Equity should not be taken lightly or ignored.

Almost all of these firms have their own goals, preferences and investment strategies they like to follow in order to make an investment in a company, and because those predilections vary so greatly from firm to firm, we are not able to identify exactly what all Private Equity Groups are looking for in an acquisition. However, we have been working with these groups for many years now, and this experience has helped us gain a basic understanding of the types of technology companies they might have an interest in pursuing. Here’s a few elements that, in one way or another, tends to encompass the basic investment strategy of most Private Equity Groups:

  1. High Quality People – when Private Equity invests in a company, they oftentimes look at the people running the business. Many times, Private Equity will have an interest in one or more of the founders remaining active in the business for a period of time after the acquisition. So, as they begin to pursue an opportunity, they want to ensure that the people they are investing in can help them not only receive a 1 for 1 return on their investment, but potentially provide a minimum of a 10 to 1 return. They call this a home run.
  2. Minimum Earnings – Different groups have different strategies, but most like to see annualized earnings of at least 1 Million. We know of others that will entertain discussions with those that are attaining $500,000 in annual earnings, but usually those need to fulfill additional criteria, like being highly specialized, have Intellectual Property, low competition and/or high barriers to entry.
  3. Scale Capacity – Private Equity looks to ensure that what it is investing in is not only currently on a growth trend, but has the capacity for growth for the foreseeable future.
  4. Synergies – Private Equity groups oftentimes have certain sectors that they like to work within. In fact, many times, different partners will be in charge of and lead discussions regarding the particular sector that targets operate within.

In summary, if a target company goes on the market with good people, the right level of earnings, can continue to grow effectively, and has sector synergies with the group, then it is highly likely that that group will take an interest and potentially invest in that target.

At, our job is to find the right acquisition partner for each of our clients. For those making a minimum of $500,000 per year, we often will market the opportunity to our network of Private Equity Groups before going to the open market, if the Seller is in alignment with this strategy. Private Equity can be a dream come true for many selling entrepreneurs because it can open the doors to a number of opportunities well beyond the initial transaction. Putting yourself in a position to be successful, and making a Private Equity Group money by adding value to the investment are great strategies for having a partner for additional business models in the future.

Our job is also to help a business owner prepare the company for presentment to a private equity group. Some of the things we regularly talk about with our clients on this subject are the following:

  1. Business Valuation – A private equity buyer will want to take advantage of an effective and experienced management team that can assist the firm with growing the company after the sale. As a result, a seller who is looking to cash out and retire may not always be the best fit for a private equity buyer. Therefore, it is important that the seller know the value of the company going into these discussions to best understand the value she will receive in a private equity buyout.
  2. Employee Support – The transaction is more likely to succeed if the operations team and key employees support the deal. The Seller should spend time preparing the business for exit by ensuring that the right people are leading the company and are inclined to support a buyout.
  3. Business Broker – A qualified business broker can add tremendous value in positioning the business for sale, running a sale process, identifying the best private equity buyer, and helping to negotiate key deal terms. Without that support, it’s much more difficult to continue business operations as usual during the process, or to take a step back to allow your third party, the broker, to manage the process and be the aggressive one in negotiations. Since you will likely be involved after the transition in some capacity, it is always easier to be on good terms with a buyer if you aren’t the one directly negotiating deal terms.
  4. LOI – A seller should closely evaluate the material terms of an offer before signing a term sheet. An experienced business brokerage can help a seller not only understand these terms, but also negotiate them so that he/she is in the very best position to be successful after the letter of intent is signed.
  5. The Books – Private equity buyers generally require a review of seller’s audited financials for a minimum of the preceding 2 years. A seller who is preparing its books and records for review by a private equity buyer should also use the opportunity to remove personal assets that may be carried on the company’s books (also called, add backs).
  6. Due Diligence – We counsel our clients that being forthright about due diligence issues early in the process allows a seller to build trust with a private equity buyer, enabling a quicker close to the transaction. A seller should help the private equity firm understand the business and avoid hiding problems until late in the negotiation. That rarely if very works, and again, takes the element of trust out of the deal, thus increasing its risk profile.
  7. Continued Equity – Part of the purchase price may be in the form of a hold-back, equity of the new company, or an earn out. Sellers will often have the opportunity to share in the continued growth of the company, but may also need to share in the risk that the company does not thrive.
  8. Changes – Private equity firms have highly trained, experienced professionals on their staffs that can succeed at finding hidden value in an acquired business. The seller should be prepared for changes after the sale.
  9. Time – Selling a business is a complex transaction that requires a considerable amount of attention. During that process, however, the seller must continue to operate the business profitably, making the preparation for the sale process especially important. This is why it is critical that a seller obtain a broker to run the process so that the seller can focus on business continuity while the broker manages the deal.