Selling your business to private equity

What selling to private equity means

Selling to private equity means selling to a buyer that intends to own the company for a period and then sell it again, at a higher value if its plan succeeds. That intention shapes what the firm pays for, how it structures the price, and what it asks of the owner after closing. An owner who understands the model can tell which terms follow from it and which are open to negotiation.

How private equity buys

A private equity firm raises money from investors into a fund, buys companies with that money and often with borrowed money as well, works to grow their earnings, and sells them later. Its return depends on buying well, growing the earnings and selling at a good price, so its diligence is thorough and it looks hard at what can grow.

Firms buy in two broad ways. Some acquire a company to be the foundation of a group in its sector, then buy smaller companies to add to it. Others already own such a group and are looking for additions. A founder-owned company can be either. A company bought as the foundation needs management that can lead a larger business; a company bought as an addition is often valued for its customers, its people, its licenses or its location, and is folded into the group.

What private equity pays for

Private equity prices earnings and the confidence that they will continue and grow. Larger companies are usually measured on EBITDA, earnings with a manager's salary in place of the owner's, rather than on seller's discretionary earnings, so it is worth knowing which figure an offer refers to. Beyond the figure, a firm looks for a documented recurring base, a spread of customers with no single account carrying the company, a management team that runs the business without the owner, clean financial records, and room to grow through new locations, new services or further acquisitions. The guide to what buyers look for covers each of these.

How the price is structured

Private equity offers are rarely all cash at closing. The common elements are these:

• Cash at closing: the part of the price paid when the company changes hands, and the first figure on which to compare offers.
• Rollover equity: part of the price taken as a stake in the company after the sale rather than in cash, so the owner shares in its later sale. It can be valuable, and it is an investment in a company the owner no longer controls.
• An earnout: part of the price paid later, and only if the company meets agreed measures after closing, under the buyer's management.
• A seller note: part of the price lent to the buyer and repaid over time.
• Escrow and the working capital peg: an amount held back after closing to cover surprises, and the agreed level of receivables, payables and inventory the company must deliver.

The same headline price can describe very different transactions. Reading a letter of intent explains how to compare them, and the language of a sale defines each term.

A recapitalization instead of a full sale

Private equity does not only buy whole companies. In a majority recapitalization, a firm buys a controlling share and the owner keeps a meaningful stake and often a role. In a minority investment, the firm buys a smaller share and the owner keeps control. Both give the owner liquidity now and a share in what the company becomes. Wild Rose Advisors sets these capital options beside a full sale, so the owner chooses with every option priced.

What changes after closing

A private equity owner brings a board, regular reporting, budgets and a plan for growth. Monthly financial reporting, approval for larger decisions and new people in finance or operations are common. An owner who stays on, as a manager or as the holder of rollover equity, should expect to work within that structure. Employment terms, the length of the transition, the owner's authority and the treatment of the existing team are negotiated before the letter of intent is signed, not after.

Questions to ask a private equity buyer

• Is the financing for the purchase committed, and how much of it is borrowed?
• Is the company to be the foundation of a group, or an addition to one the firm already owns?
• How long does the firm usually hold a company, and what happens to rollover equity when it sells?
• What role is the owner expected to play, for how long, and on what terms?
• What happens to the team, the name and the premises?

A serious buyer answers these routinely. The answers belong in the comparison of offers, beside the price.

Private equity among other buyers

Private equity is one kind of buyer, not the only one. A strategic acquirer already in the sector may pay for what the company adds to its own operations, and a private investor may offer simpler terms. Wild Rose Advisors represents the owner and puts strategic acquirers, private equity and private investors in competition for the company, so the price and the terms are set by comparison. The process is set out on the sell-side page, and how to sell my business walks through each stage.

Common questions