When, why and how to sell your business to a private equity firm

Selling your business is one of the biggest decisions you will make as an owner. Not only do you want to maximize your return on the time and capital you’ve invested in your business, but your ability to make a successful exit will also affect your reputation as an entrepreneur. Most business owners naturally look to a large strategic or direct competitor as potential buyers, but many overlook private equity (PE) as a logical buyer. 

What makes a private equity buyer different?

The biggest difference between a strategic buyer and PE is PE rarely looks to buy 100 percent of the business. Their intention is typically to partner alongside the existing owner or management team over the timeline of their investment. In most situations, PE groups look to purchase anywhere from 51 to 90 percent of the business.

The option of selling only part of their business can be enticing for some owners — a significant percentage of whom have their net worth tied up in their company. While many of these owners have a need to create liquidity, they often prefer not to sell their business outright.

Private equity offers the owner the ability to pull out some of the wealth that has been created while maintaining control of the business and continuing to drive its growth. Essentially, they get to pull some of their chips off the table.

How private equity groups can drive growth

There are also situations where the owner requires capital to grow but is uncomfortable shouldering the risk that comes with financing the growth on their own. This is another situation where the best solution could be a partial sale to a PE group.

Not only will the PE group provide capital to create liquidity for the existing business owner, but they can also inject additional capital to support various growth initiatives. Generally, PE groups have access to capital that isn’t available to the current owner, funding it directly or through one of their banking relationships.

There are very few situations where the owner gets to walk away from the business after the transaction closes. More often ­they will be expected to transition the business over a period of one to three years — especially if the owner is heavily involved in the day-to-day operations. In fact, most buyers will tie some of the purchase price to this transition period.

A sale to a PE group allows the owners to continue to build value over this transition period and take advantage of a second liquidity event that can be even bigger than the first.