Selling to Private Equity – the Good and Bad

Aug 9, 2023Selling Businesses

Attention business owners! I get this question ALL THE TIME, are you considering selling your business and wondering about the benefits and drawbacks of engaging with a private equity buyer? Let’s dive into it!

High level – all the talk is about private equity, but what is it? Private equities are sold on the private market and not in public spaces. Firms raise money from private investors who commit to 4-10 years to deploy the capital with strategies that align with investor interests. Private equity’s primary goal is deal flow and company growth.

Where sellers might have a false idealistic view of who a potential acquisition could occur, not all acquisitions are all-cash offers. They need to manage their cash position and use traditional debt to fund upwards of 50% of deal transactions.

Private equity firms, with their extensive financial resources and expertise, can be an attractive option when selling a small business. Here’s why:

Access to Capital: Private equity buyers bring substantial financial firepower to the table, enabling them to invest in your business’s growth, expansion, and innovation. This infusion of capital can accelerate your company’s development and help you realize its full potential.

Strategic Guidance: Private equity firms often have a deep understanding of various industries and can offer strategic guidance based on their experience and network. Their expertise can help you navigate market challenges, identify new opportunities, and optimize your operations.

Professional Network: Selling to a private equity firm means gaining access to a vast network of industry contacts, potential partners, and resources. Leveraging their connections can open doors to collaborations, distribution channels, and talent acquisition, fostering further growth.

Partial Retention of Ownership: Unlike selling to a competitor or a larger corporation, private equity buyers often allow business owners to retain a stake in the company. This arrangement provides the opportunity to continue contributing to the business’s success while sharing the risks and rewards with the new partners.

However, it’s crucial to consider the potential drawbacks of selling to a private equity firm:

Reduced Autonomy: Private equity investors typically seek an active role in decision-making processes, which can lead to a loss of full autonomy for the business owner. Collaborating with a private equity firm means sharing control and aligning interests to achieve common goals.

Exit Timeline: While private equity investors bring the promise of growth and value creation, they also have specific exit strategies in mind. Business owners should be aware of the time horizon involved in the investment, as it might differ from their original vision or long-term goals.

Operational Changes: To maximize profitability and efficiency, private equity buyers may implement operational changes, such as streamlining processes or restructuring the organization. These changes can be beneficial but might also disrupt established workflows or company culture.

Share your thoughts: What factors are most important to you when considering such a transaction? Let’s discuss in the comments below!

What you don’t know can be costly – we help eradicate uncertainty. We make buying and selling businesses profitable for both parties. Call me to talk to me about buying, selling, and business valuations in Oklahoma.