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What You Need to Know When Selling Your Business to a Private Equity Firm

As seen in Westchester and Fairfield County Business Journals

Selling a business to private equity marks a dramatic change in lifestyle, a change in how you think about and approach your work, and the start of a new journey, with a new approach to the business. Most business owners will only execute a transaction like this one time, so learning about how the sale will impact you and how you should prepare for the transaction itself is crucial.

If you’re just starting off and need to prepare yourself and your business for the sale process, here are two areas to spend time on:

Understand yourself

There are fundamentally two questions to ask yourself:

How much in proceeds do you need from the sale in order to meet your financial needs?

Put a wealth plan together. The purpose is not to optimize the performance of your portfolio; it is to develop a model to find out how much money you need after selling the business to accomplish the things you want to accomplish. This allows you to have a realistic conversation about the value of the business (and potentially needing to increase it before selling), structure of the transaction, and how you approach negotiating the sale price.

How comfortable and/or capable are you with regard to staying involved with the business after its sale?

Some private equity buyers will want you to stay involved and some will want to bring in professional management. Business owners have different preferences for the type of buyer they prefer – does this matter to you?

If you want to stay involved in a leadership position and your buyer wants you to do so, you need to make sure you are comfortable changing the way you run the business. Private equity wants to manage the business at scale. This means data-driven decision-making, measuring business processes, actively managing the performance of your team more efficiently, and ultimately changing how the business works and feels in order to help it grow. If that sounds fun to you, then rolling some equity and staying on in a management capacity until the next transaction may be a feasible approach for you; if it doesn’t, then you should be realistic about how long your transition period should be.

Understand the business

Now that you have a handle on your personal needs, there are three things to understand about the business: 

First, have an independent set of financial reports prepared. This may be a reviewed set of financial statements or a sell-side “quality of earnings” report. Buyers will want to see your financials and know they are valid. Get any gremlins or small business accounting quirks out of your numbers now and understand where you have weaknesses in your ability to produce accurate financial statements. It is likely private equity buyers want to see these statements differently than how you currently produce them, and these reports will help you see your numbers in the same context as a buyer.

During this process, address weak accounting processes and controls. Potential issues like whether or not you can close your books and produce financials quickly every month, whether or not you have a high-quality cash reconciliation every month, whether your inventory is perpetual and accurate in real-time, etc., can have a substantial impact on buyers’ confidence in your books and can be fixed now without significant business disruption.

Second, get an independent assessment of your business infrastructure – its organizational model, business processes, and the systems you are using. Buyer due diligence can become challenging and sometimes falls apart when unexpected items come up – and that means unexpected items for either the buyer or the seller. To avoid this, understand now:

  • How will an outside buyer look at your management team? Will they see them as capable of running the business or likely to perform at a high level with the addition of team members?

  • Will a buyer have confidence that your business can be run, measured, and improved if you personally are not involved? Will the processes the business uses to run remain predictable, and will metrics like cost of quality, sell-through rate, on-time delivery, and gross margin all be sustainable and improvable with the current structure?

  • Will your systems require significant investment after an acquisition and, if so, how risky will the required projects be?

Finally, have an advisor help you understand what the business is worth now. M&A trends change constantly and you will need a market-facing view of what your company is worth to private equity buyers. This will also uncover investment trends in the private equity space, which may help you craft your business’ value proposition to meet many of your buyers’ investment theses.

Next steps

Assemble a circle of trusted advisors to help prepare the business for the sale, create value leading up to the sale, and run a smooth and high-value sale process. There will always be bumps along the way, but if you have the right information to focus on and the right advisors at your side, you will be able to keep those bumps in context and make smart decisions that maximize your value.

We can help. If you are thinking of selling your business and either don’t know where to start or are struggling with one of the areas in this article, reach out for a conversation.

Our specialists are here to help.

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