The short answer to the above question is this: in general, business owners need to begin developing relationships at least five years before they intend to phase out of their business. Owners not ready to retire often believe it is too early to consider an exit strategy. For this reason, many business owners miss out on what could be the best years of ownership for lack of understanding their options—especially their options with private equity. If you are an owner, you may have voiced some of the following questions and comments:
“I couldn’t work for anyone else after owning my own company!”
That may well be true. But some buyers and most private equity groups (PEGS) will not invest in your company unless you or at least your management team will continue running the company. PEGS are not organized to run businesses. Their expertise tends toward financial modeling, lender relationships, and acquisition activities.
“I’m having too much fun to sell out now!”
What you’re actually saying is: “I’m having too much fun to retire now!” A PEG simply provides you substantial cash now for equity while encouraging and financing you to continue growing revenues and profits.
“Why would I sell just part of my company rather than totally cash out?”
Oftentimes the “second bite of the apple” is greater than the first. With funding and growth your remaining equity appreciates and oftentimes the sale of your remaining equity exceeds the monies received from initial partial equity sale.
“We are a family-held company. Our shareholders could never agree on what to do with the company.”
That’s exactly why a PEG may be the solution. Experienced with family dealings, a PEG may fill various demands by providing liquidation of shares for some and ongoing employment and/or stock appreciation to others.
“I’ve got kids coming along and want to see if they can manage the business.”
A PEG hopes your offspring can manage. But some owners prefer that the PEG rather than a family member evaluates and takes appropriate steps to assure management performance.
“We’re growing rapidly and business is good so now is not the time to sell.”
The time to sell is when business is up and the future is promising. Buyers disappear when they perceive growth has crested. Investors talk about multiples of historic earnings but, be assured, the value is based upon future cash flow.
"I don’t want someone selling out this company and management after a few years.”
Similar to your motivations, a PEG seeks to build the company and shore up the management. Many PEGS also desire that management owns equity. Companies are valued highest when management has a proven track record and a commitment to continue. Thus career opportunities and financial rewards occur when management performs.
“I already have a strategic (industry) buyer that is interested. Why talk to someone that is not a leader in my industry?”
A strong industry player may want you most but may not be your best buyer. Oftentimes strategic buyers anticipate increasing profits through cost reductions (eliminating your key people). A professional investor that is not intimate with your industry may value your knowledge and company identity more than a strategic buyer. Sometimes the strategic buyer may be the best option but an astute owner may select a PEG for reasons including:
Our advice is this: Do not try to bundle your retirement, cashing out, and transition plan into one quagmire of issues. Start early and evaluate your options with a trusted M&A advisor who can help you develop a plan in stages. In this way, you can manage your personal future as well as manage your business.