Friends,
As a follow-up to last week, we would like to highlight two other options to explore when looking to exit or transition ownership of your business. Structuring a sale to private equity and creating a plan to sell a family-owned business can bring unique challenges.
Private equity (PE) firms raise capital from institutions or high-net-worth individuals to invest in private markets. The PE firm often purchases a company (or at least a controlling portion) via an auction-style sale in which several competitors submit bids to buy the private business. The goal is for the business to be resold within 3-7 years to turn a profit for its investors.
Potential advantages of selling to a private equity firm:
- New Funding: A cash infusion could help purchase or develop new technologies, make capital expenditures, or make acquisitions to facilitate growth.
- Business partner: Flexibility in choosing the investor the founder will partner with and who will likely own most of the business going forward.
- Expert Knowledge: Typically, the private equity firm will buy a company in which it has industry expertise and possesses knowledge of how to increase the value of the company so that it can sell again at a profit. The firm may also bring in experienced board members and facilitate introductions to strategic partners.
- Maintain ownership:Although most PE firms want to acquire a controlling interest in the business, they typically want the sellers/management team to retain a meaningful ownership position.
Potential disadvantages of selling to a private equity firm:
- Loss of control and dilution:The PE firm will usually take a controlling ownership position and have the right to make decisions regarding strategic vision and operations.
- Valuation: The PE firm wants to provide a fair value for the business but would like to purchase it at a price that would yield the most profit. This valuation might be lower than that offered by a strategic buyer who may be able to use future synergies to justify a higher price.
Selling a multi-generational business can be emotional and tricky, and contemplating the post-exit life should occur well in advance. See below for important considerations while developing a strategy for selling a family business.
Some things to consider when selling a family business:
- Develop a Plan:Just like an owner has planned and executed a growth strategy for the business, a design for the exit is imperative. Discuss and agree upon the plan with other family members or key personnel in the business.
- Build a Team: A group of professionals that will help develop the plan and reach goals while maximizing value includes attorneys, financial advisors, tax advisors, and M&A experts.
- Decide on Timing: Discuss who will take over (if you decide to keep it in the family) or, ideally, when the sale will occur. This decision should happen early in the process. It may take several years to prepare the company to be attractive to an outside party.
- Structure of Sale: Analyze and develop a consensus as to the preferred type of buyer. Will it be a sale to other family members, employees/management team, a strategic acquirer, or a private equity firm? This may be the most critical decision to be made to determine the future of the business.
- Analyze Tax and Estate Planning:Once the deal is closed, very little can be done to reduce or eliminate taxes. Estate attorneys and tax accountants are crucial to making the best decisions, which could impact future generations.
- Consider Factors Unrelated to Finances: Do family members feel satisfied with the plan? What will owners do after the exit? Take on a new venture, retire, or focus on philanthropy?
We’re happy to quarterback the team that leads to a successful exit for you or someone you know.
Feel free to reach out to discuss anytime.
Andrew