With nearly a third of M&A deals going to Private Equity buyers in 2022, you may be asking “should I sell to them?” The answer will be driven by several factors including the deal structure and of course price, but in a world of abundant capital, a Private Equity (“PE”) sale may be the optimal route for you. Private Equity sales typically suit owners and businesses where:
- Growth potential is good, ideally by 3 x current value in 5 years – this growth can include acquisitions.
- There is an existing and retainable management team to run the business post-sale, once the selling owners step back.
- Where one or all owners want to exit their stake, perhaps for retirement or to diversify wealth.
- The business lacks the capital to finance growth and expansion.
- The company needs an experienced partner to jump-start the business with fresh momentum and operational experience.
- Sellers seek a de-risk with a chance for a great future yield. With low yields in other asset classes, why would you not back your own business for growth?
Private Equity overview
There is a perception that Private Equity deals are too complex and financiers make difficult bedfellows. This is true if you have the wrong party but a Private Equity sale should be approached in the same way as you would a trade sale and only be secured after a process to find the right partner against a choice of bids. A Private Equity firm that understands the potential of the business, shares your vision for the future, keeps it simple and eases off the spreadsheet analysis can make a Private Equity sale highly viable.
The downside of Private Equity deals is that high leverage increases pressure on cash flow and the team, which can result in team casualties. If you are a founder entrepreneur this can be very challenging to see but the upside is the chance of securing typically 3-4 times the initial value on any retained stake.
The catalyst for growth is partially driven by expertise and this is facilitated by Private Equity’s access to the best talent, but also, and as importantly, by the change in risk profile which drives the scale-up of the business after a Private Equity deal. With Private Equity firms having access to capital, they can take higher risks than trade entrepreneurs to create double-digit growth. Having sold the majority stake, if you or your selling team stays involved, there is greater opportunity and confidence to take some risks to scale up.
When Private Equity deals are well structured, they are great for the economy as the scale-up drives more jobs and taxes – as per the old saying, “money makes money”. Building a successful small enterprise takes vision and determination, however, taking an emerging mid-market business to become a large company requires a different skillset and investment both of which Private Equity can provide.
There are lots of questions to be answered before you even consider an exit and start the business sale process – is it the best time to sell? Is your company worth what you want it to be? Do you need to wait until it is? All exits are different, as are the journeys after a sale. With every exit strategy, there is a leap of faith – a step from the known into the unknown and that is always exciting. If this sounds interesting, then perhaps Private Equity might be right for you.
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