Selling your business to private equity is not for everyone

A sale of your business to Private Equity can deliver a great result over time for business owners, however, it is not for everyone.

We have acted for numerous business owners in the sale of their companies to Private Equity Funds (PEF). In most cases, the outcomes were excellent for the business owners concerned. In the few where the result was negative, this was generally as a result of either adverse changes in market conditions or the business owner not delivering on promises.

In a PEF sale scenario, sellers need to understand that, unlike a full exit in a traditional ‘trade sale’ situation, this type of transaction is generally a two-step process that requires their ongoing commitment. A PEF will initially acquire a percentage of the business (usually a controlling stake) which allows the owner to take some money off the table but requires them to remain on board to operate and grow the company. In the Australian market, PEF business exit timeframes are generally three-five years with a select few funds going beyond this.

This two-step approach only works when the owner is fully committed to continuing to operate the business and has the drive to grow it. It is important to note that PEFs are not operators. While they will provide experience, ideas, deal structure acumen and financial resources to grow the business, they are not generally involved in day-to-day operations. They let the owner do their job, i.e. they are betting on the jockey, not the horse.

The sale of a business, regardless of the buyer, is a major decision for the owner but especially so if it does not involve a full exit. If an owner is contemplating a PEF exit alternative their adviser should consider the PEF’s track record and at the right time seek references from owners that have previously been through the process with that fund. PEFs with overly aggressive expansion plans that will overstretch the business (and the owner) should be treated with caution.

The key question for a business owner contemplating sale is why would you consider selling to a PEF rather than an outright sale? First, the actual sale process is generally easier: PEFs buy and sell interests in businesses for a living and often they are more efficient at closing the deal. Secondly, provided that the business achieves its growth targets and market conditions hold up, the overall exit result should be superior to an outright sale.

What do PEFs look for in a business? Based on our experience key criteria include:

  • High quality owner/management team
  • Clear and credible business strategy
  • Potential to take a leading market position in the sector in which the company operates
  • Potential for sustainable competitive advantage and hence strong margins
  • Growing revenue and profitability.

The proliferation of PEFs has been a boon to business owners who are open to considering a range of exit alternatives. It is important that any owner considering this route understands that it is a two-step process and that they will have a new partner going forward. For owners who truly believe in their business, want to take some cash off the table and want to keep working at it with the ultimate goal of a very lucrative payout, selling to a PEF can be the ideal outcome.

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