When we talk to business owners who are considering selling their company, we get many different opinions on whether they want to sell their company to a private equity investor.
Some owners like the idea of selling a company to a private equity (PE) group, and others definitely want to avoid selling to a private equity company. Based on our experience, we recommend keeping an open mind.
However, not all PE firms are considered equal, and knowing in what circumstances to consider private equity and when not to move forward with a PE firm can save a lot of time and money in a business sale process. We’ll discuss the pros and cons of selling to a private equity firm.
The best private equity company for acquiring your business is usually one in which the PE firm is a strategic buyer. What does a strategic buyer mean? It means that they already own a company that can leverage what you have to offer, whether that is unique technology, customers, employees, products or services. Strategic PE firms are usually willing to pay more. And they know what they are getting into, having already purchased a company in the same or similar industry.
For example, they may already own a manufacturing company that sells products to big-box retailers. If your company manufactures different products that are sold to big box retailers, the PE firm’s company will have a distribution arm in place to enlarge the market for your products. Another example would be a PE firm that owns a large national general contracting company. If you own an HVAC company that they acquire, they will most likely be able to use their contacts to expand the market for your HVAC services and thus be willing to pay more for your company.
If a private equity company has already purchased a company, they are more familiar with the process and will have people, systems, and most likely financing in place. Of course, new PE firms have to start somewhere, but the same is true of new doctors, and you wouldn’t want a doctor without experience operating on you as their first patient. The same is true of new PE firms. You don’t want to be a learning experience for them as they try to figure things out. You want someone who knows what they want and how to make the deal happen.
This seems like an obvious statement, but many private equity groups are what are called unfunded PE firms. They don’t have the money themselves but need to get investors interested after they find a company that they want to purchase. This is an extra step, and based on our experience, these firms (often called search firms) are usually a waste of time. They may put in an offer for your company, but we advise our clients not to accept any exclusive offer from search firms or unfunded firms. The only way we would advise accepting an offer is if we have made sure that the investors have signed off on the deal and are ready to invest. You don’t want to be speaking to the people who aren’t making the final decision of whether to invest or not.
When we are handling the sale of our clients’ companies, we will be talking to other types of potential buyers in addition to PE firms. Everything else being equal, our biggest preference is often well-funded business owners who already own a company in the same or similar industry that can leverage what our clients have. So this would be the same as the strategic PE firm that we talked about previously, except in this case, they are self-funded as opposed to having funds from a PE firm. This type of buyer can have advantages over selling to a PE firm. Often, these buyers are busy running their business as opposed to PE companies that are constantly looking to make acquisitions, and therefore, PE firms usually have a number of deals they are working on simultaneously and may only close on a small percentage of the deals in their pipeline. The business owner will usually only invest their time in acquiring a company if they feel strongly about the possibility. Of course, the devil is in the details, and it depends on what the PE firms are offering vs. the business owners we are talking to. Also, the PE firms will usually do more extensive due diligence, so we will want to nail down what their expectations are on this to save our clients’ time. Ultimately, we will evaluate all of the pluses and minuses of each buyer and each offer to help our client decide which letter of intent (LOI) to sign. Price and terms are an important part of this, but you also want to select the buyer who is most likely to close on the deal. You don’t want a buyer who sees one minor thing that concerns them and then decides to back out of the deal at the last minute or renegotiate the price. Some of these skills in determining who the best buyer is really based on experience. Synergy Business Brokers has experience closing hundreds of deals and will guide our clients to the buyer who has a solid offer and is more likely to close on the deal.
Individual buyers who don’t currently own a company can be good buyers if they have already purchased and sold a company and now are looking for the next company to acquire. Particularly if they have the funds from their recent sale that can cover the purchase of your company without external financing. They will have the advantage of having already gone through the process, and of course, we are looking for ones that are motivated to start their next venture soon and have the knowledge and experience in your industry to feel comfortable with how they will operate your company after the acquisition.
Selling to a public company or a company with a lot of owners can be a good thing, but it can also come with more complexity. We will want to understand what the decision-making criteria are of the large corporation and whether or not we think they are a better bet than the private equity buyers or individual buyers that we are talking to. Large Public companies typically will not have trouble getting the financing for a purchase, but they may have more layers of management to approve or disapprove of an acquisition. In addition, similar to PE firms, large corporations are typically looking at a number of different deals and may move forward with only a small percentage of the deals they are reviewing. This is because they usually have a corporate development or M&A department that does nothing but review potential acquisitions and keeps busy by reviewing as many possibilities as they can. This is not to say that a PE firm or large corporation may not be your best buyer, but we’ll want to evaluate things on a case-by-case basis to make sure that they are making good use of our clients’ time and not just kicking tires.
When we are selling a business, we will typically have hundreds of potential buyers to choose from. There will be a mix of PE buyers, larger corporations, business owners, and individuals/entrepreneurs. Some will self-qualify themselves out of the running by not being interested. After we have narrowed it down to those that are interested and have signed a non disclosure agreement and they have provided us with information about their qualifications, then we’ll provide them additional information, set up meetings with our client, solicit offers and evaluate which offer and which buyer we might want to consider signing on with and moving forward to due diligence. This is an important decision because due diligence usually lasts 60-90 days without the ability to pursue other buyers. So we will want to take into account the pluses and minuses of each buyer and make a careful decision on which buyer to move forward with. We typically go in with an open mind and weigh the merits of each potential buyer on a case-by-case basis. In addition to these factors, most sellers want to feel comfortable with the buyer who will be taking over their company. That’s why it’s important to meet face to face with the buyer to see if you can envision that person running your company and working with you on the deal and transition.
If you are considering selling your company. Take advantage of Synergy Business Brokers’ 20+ years of experience to help you find and select the right buyer for your company. We are an award-winning M&A firm that specializes in selling profitable companies with annual revenue of $700,000 to $250,000,000 in construction, distribution, manufacturing, healthcare, services, technology, and transportation.
To get started with a confidential consultation with one of our experienced M&A advisors, call (888)-750-5950 or fill out our confidential form. We look forward to hearing from you.
