Private Equity: Considerations When Selling to a Private Equity Firm
Selling your company is a big decision that can have significant impacts on your financial future and the legacy of your business. If you are considering selling your company to a private equity firm, there are several things to consider. This blog post will provide an overview of how private equity firms operate, what deal structures look like, and what involvement you can expect after the transaction. We will also discuss why hiring Dallas business brokers for this type of transaction is advisable.
What is a private equity firm?
Private equity firms are an increasingly popular choice for companies looking to sell their business, but what are they? Private equity firms are investment firms that raise funds from institutional investors, such as pension funds and endowments, to invest in companies of various sizes and industries. As innovation and industry disruption continue to shape the business landscape, the role of private equity groups in driving strategic investments has become increasingly significant. Whether investing in start-ups or established firms, these groups play a vital role in shaping the future of the global economy.
How do private equity firms operate?
Understanding how a typical private equity firm operates can help prepare and leverage your company to reach full value when selling. These investment firms are typically managed by experienced professionals who have expertise in buying and selling businesses. Through rigorous due diligence and strategic vision, private equity firms can unlock value and growth in a wide range of industries. Private equity firms look for companies that have strong growth potential as well as potential for operational improvement. Typically, their goal is to hold onto the company for a few years and then sell it for a higher valuation. However, some private equity firms will acquire and hold well-established companies in the long term. As such, private equity firms are focused on achieving a high return on investment for their investors.
What do deal structures typically look like?
Deal structures can vary significantly from one group to another. Some groups may offer a straightforward buyout of the company, while others may opt for a majority recapitalization. A majority recap can be advantageous for a seller that is interested in keeping a minority stake in the company with the option to sell later but it may entail a level of involvement which we will later discuss. Additionally, private equity firms may offer various value-add services, such as operational expertise and access to their network of contacts. As such, it is essential for companies considering private equity investment to carefully assess the various deal structures on offer and choose the one that best aligns with their goals and objectives.
Determine if private equity firms view your company as a platform or add-on business.
As private equity firms continue to invest in a diverse range of businesses, it is crucial to determine whether your company is viewed as a platform or an add-on business. A platform business serves as a foundation for additional investments and growth, while an add-on business is a complementary addition to an existing portfolio. Understanding where your company falls on this spectrum can impact the level of attention and resources invested by private equity firms. As a professional, it is important to comprehensively evaluate your company’s current position in the market and articulate its potential for growth and sustainability. By positioning your company as a strong platform business, you can better attract and leverage the expertise and resources of private equity firms.
What will your involvement look like after the transaction?
After the transaction has been completed, private equity firms will typically be involved in the management of the company. Their level of involvement will depend on the specific private equity firm. They will often appoint their own board members and executives to help run the company or replace the current management outright. In most cases, they will work closely with the existing management team to implement their growth strategies and improve the company’s operational efficiency. It is important to be comfortable with the level of involvement the private equity firm will have before agreeing to the sale.
Understand potential tax implications before selling.
Selling your company can also have potential tax implications that should not be overlooked. The amount of tax you will owe will depend on factors such as the price allocation, the form of the entity you are selling, and whether the deal is structured as a stock or asset sale. Most private equity firms will have their own CPA, helping them structure the most advantageous deal from a tax perspective. This is where the guidance of a business broker or M&A advisor, as well as a CPA, can be invaluable in helping to structure and negotiate the best deal for you. A skilled CPA can guide you through the complexities of the tax code, help you identify tax-saving opportunities, and clearly understand the costs and tax implications of each proposed deal structure. At the same time, a business broker or M&A advisor can help you negotiate key deal terms, such as the purchase price, earn-out provisions, and the timing and form of payments to minimize tax liabilities. Ultimately, working with a business broker and CPA can help maximize your financial return when selling your business and reduce your tax burden.
Why it’s advisable to hire local Dallas business brokers or M&A advisors.
Now, let’s discuss why hiring professional Dallas business brokers or M&A advisors is advisable for this type of transaction. Selling your company to a private equity firm is a complex process that requires expertise and experience. Some private equity groups may attempt to approach the company owner directly to secure a proprietary deal. While this may seem like the most efficient way with less perceived hassle from third parties, it will typically result in less negotiating power for the seller and receiving a less than competitive price. Local Dallas business brokers can help you navigate the process and ensure that you get the best possible deal. Utilizing their local and national network of buyers, they can help you find the right private equity firm to work with and negotiate favorable terms for the transaction. Dallas business brokers can also help you understand the due diligence process and prepare all the necessary documentation for the sale.
Take measures to prepare your business for sale!
Selling a company to a private equity firm can be exciting and stressful for business owners. As you consider this strategy, you must understand the terms of the deal structure, how the private equity firm intends to grow your company, any impact of a change in ownership on current business relationships, the level of involvement after the sale, and potential tax implications. While there are challenges associated with selling to a private equity firm, getting a good deal for your company is possible by hiring local Dallas business brokers or M&A advisors. Ultimately, it’s up to you as the business owner to see if selling to a private equity partner best serves the business while still providing desired outcomes. So, are you considering exiting your business? Reach out to V-AID today; they have Dallas business brokers and M&A advisors with years of experience navigating and advising companies through selling their businesses with the best results.