Selling Your Business? A Private Equity Firm Might Want to Buy It.

Who’s looking to buy your privately owned business? The universe of potential buyers typically includes your current management team, your family members, a strategic buyer who may be horizontally or vertically integrated with the same or a similar industry, Family Offices, and the focus of this article, a private equity firm.

What are private equity firms?

Private equity firms are investment firms that specialize in buying privately held businesses. They typically raise capital from institutional investors such as pension funds, endowments, insurance companies, and high-net-worth individuals and families. The capital they raise is used to acquire businesses they believe have the potential to grow and generate profits.

Private equity firms may have multiple funds for which they have raised money, with each fund having its own objectives, a specific investment strategy that guides its acquisition decisions. Some private equity firms may focus on a particular industry or geographic region, while others may be more agnostic about the businesses they look to acquire. Private equity firms might also consider the stage of development of a business, some focusing on early-stage companies with potential for significant growth while others target mature businesses looking for a capital infusion to fuel their next phase of growth.

Private equity firms have teams of investment professionals responsible for identifying and evaluating potential acquisition targets. Their methods for finding businesses include contacting business brokers, reviewing industry trade publications, and networking with industry experts. They often have individuals who simply make phone calls to business owners in the hopes of finding some willing to discuss selling their businesses. Most privately owned business owners report having received at least one unsolicited call from a private equity firm.

The firms can provide a variety of benefits to the businesses they acquire, including access to additional capital, operational expertise, and industry connections. However, they also operate under a different set of incentives and expectations than traditional business owners. Business owners need to understand these differences before entering a private equity transaction, because typically they will be required to put 10 to 30 percent of the sale proceeds back into their business that will now be majority owned by the private equity firm.

Benefits and considerations for business owners

A primary benefit of selling to a private equity firm is access to capital. The firms often have substantial financial resources at their disposal to invest in the growth and expansion of the businesses they acquire, which can be particularly useful for businesses seeking to fund new projects or expand into new markets.

Private equity firms can also bring operational expertise to the businesses they acquire. Many of the firms field teams of professionals with experience in such areas as finance, marketing, and operations who can work with the management of the acquired business to identify and implement best practices, which in turn can improve the efficiency and profitability of the business.

They may also have a network of industry connections that could benefit the businesses they acquire. For example, they may be able to introduce a business to potential partners, customers, or suppliers, or help a business tap into new markets.

Before selling to a private equity firm, a business owner should understand the holding period or exit requirements of the specific private equity fund. Unlike most other buyers from outside the company, private equity funds are required to resell at some point the businesses they buy in order to return profits to their investors and their firm. That can be a positive or a negative in the eyes of a selling owner who will still owns 10 to 30 percent of the business.

A private equity firms typically has a specific investment holding period, during which they work to improve their acquisition’s operations and profitability. Once they reach their investment horizon, the firm will typically seek to sell the business for a profit. The holding period will depend on the mandate of the specific fund and what time in the lifecycle of the fund a specific business is acquired. You can expect your business to be resold within a three-to-seven year window, and possibly to another private equity firm that will attempt to grow and sell the business within their specified timeframe. That might not sit well with a business owner who wishes to see their family’s legacy and relationship with their community live on.

While private equity firms can deliver a variety of benefits to businesses they acquire, business owners need to understand the expectations and incentives of private equity firms. Private equity firms are ultimately focused on generating returns for their investors, and they will expect the businesses they acquire to grow and generate profits in a relatively short period of time. That could involve changes to the business, such as streamlining operations, cutting costs, or expanding into new markets. Business owners considering a sale to a private equity firm should be prepared for these changes and be willing to work with the firm to achieve agreed-upon goals.