Business Exit Strategy Guide for Owners: Selling Your Business to Private Equity

November 12, 2024 | Ryan Ware | The Connection

The Connection: November 2024 Issue #37

As a business owner, selling your company is a big decision that requires execution. One of the most well-known exit strategies is selling your business to private value (PE) firms. Private value firms invest in companies to develop them, improve their performance, and eventually benefit from their sale.

Here’s a guide to help you understand the process of selling your business to private equity

What is Private Equity?

Private equity refers to investment firms or funds that secure businesses to move forward and develop them before selling them for a benefit. These firms regularly see businesses with the potential for development, operational enhancements, and a clear way to expand productivity. Private value firms have the capital and expertise to assist businesses to reach another level.

Why Sell to Private Equity?

There are a few reasons why business owners select to offer private equity:

Capital Infusion: Private equity firms can provide capital to help develop your business faster.
Operational Support: Many private equity firms offer management expertise, strategic direction, and ways to improve business operations.
Maximizing Value: If your business has potential but needs a key boost, private equity can help you unlock that value.

Steps On How to Start a Private Equity Firm

Here are some steps you should follow:

Plan Your Business

Before you approach a private equity firm, preparing your business is important. A clean, well-organized financial record is key. Here’s what you are required to do:

Financial Documentation: Private equity firms will carefully survey your balance sheets, income statements, tax filings, and other financial documents.
Operational Survey: Examine and change your commerce operations, including your staff structure, supply chain, and client relations.
Legal Cleanliness: Ensure all legitimate angles are in place, such as contracts, rights, and employee agreements.

Valuing Your Business

Valuing your business is a basic step in the sale process. Private value firms must know how much your business is worth before making an offer. A few strategies are utilized to esteem a business:

Comparable Company Investigation: Compare your company to comparable businesses that have been sold.
Discounted Cash Stream (DCF): Venture your business’s future cash streams and mark them down to show value.
Earnings Products: These products can be applied to estimate value based on your company’s profit (EBITDA or net wage).

You may need to work with a business appraiser or financial advisor to help with this process.

Identify Potential Private Equity Buyers

Once your business is ready for sale, you can start identifying potential private equity firms. Many private equity firms specialize in particular industries. Look for firms that have experience in your sector. Choose a firm whose investment style aligns with your goals.

Approach Private Equity Firms

Once you’ve identified a few suitable private equity firms, it’s time to start the conversation. You can approach them through:

M&A Advisors or Brokers: These professionals can help you find and approach private equity firms and negotiate the sale.
Direct Outreach: You can also reach out directly to firms interested in your business.

At this stage, the private equity firm will request information about your company, and they may sign a Non-Disclosure Agreement (NDA) to protect the confidentiality of your business details.

Negotiating the Sale

Once due diligence is complete, the private equity firm will make an offer. This offer will include the terms of the sale, including the purchase price, payment structure, and any contingencies.

Will you receive the entire purchase price upfront?
Will you continue to be involved in the business after the sale?
If so, what role will you have?

Closing the Deal

Once terms are agreed upon, the final step is to close the deal. This involves:

The legal documents that finalize the sale.
You’ll officially transfer ownership of the business to the private equity firm.
Consult with your accountant to understand the sale’s tax impact.

Conclusion

Selling your business to private equity can be a great exit technique if you want capital and operational support to develop and grow your business. By planning your company, esteeming it appropriately, and working with the right private equity firm, you can guarantee that the deal prepared is fruitful and maximizes your business’s value. Remember, carefully arrange and look for the right experts.