Written By: Andrew Gelfand
Read By: Nora Mahoney
When preparing for the sale of a business, there is something called the “two-step process” for private equity group partnerships — an approach in which the owner sells a minority interest in their company to a professional investor such as a private equity group (“PEG”). Often, an owner will partner with a private equity group as a first step to a planned sale, specifically when they want to maintain control of the company to benefit from its future appreciation, but also to “take money off the table” and create personal liquidity.
Typically, the ultimate outcome of the PEG partnership is the sale of the company three to five years into the future – the second step of the two-step process. As we pointed out in the last email, however, a private equity partnership is not always a match made in heaven, and it is not for everyone.
For owners who choose the two-step process toward a sale, it is as much a personal decision as it is a business decision. PEG partnerships can be complicated, and they often have implications for the business owner that may not be apparent during the courtship and diligence phase. Owners who are considering a relationship with a private equity group should engage in some honest self-reflection to confirm that this is the type of partnership in the best interest of the company, its employees, and of course, themselves. With all that said, under the right conditions, a PEG partnership can be a very attractive option for an owner seeking partial liquidity and a sale of the company in the near future.
So, let’s get personal. No, not “let’s have coffee” personal, but let’s examine some of the key personal considerations for the owner to consider before partnering with a private equity group.
- Is the owner absolutely certain that they understand what it means to have any partner let alone a private equity group partner? The owner should answer the following questions honestly: Will having a partner help the owner achieve more than they could achieve on their own? Is the owner receptive to new ideas, input, and a new governance structure (e.g., Board of Directors)? If the answers are yes, the owner can move forward and “green light” a search for the right private equity group partner. If the response is no, it may be time to put the brakes on the entire partnership conversation.
- Why is the owner considering a private equity partnership? Perhaps the owner is bullish on the company but is not yet ready to exit. Perhaps they foresee exceptional opportunities, but these opportunities require capital that the owner, given their age, is not willing to invest. Or perhaps the owner is grooming a successor to take over in the near future but needs some time for the heir apparent. All of these scenarios may prompt an owner to seek a private equity group partnership to diversify their personal net worth in advance of the sale of the company.
- Does the owner have specific goals in mind for the partnership, specifically with respect to actions to increase the value of the company? The company might be poised to launch a new product or technology, or enter a new market, and the venture requires input, expertise and/or capital. The right private equity partner can provide these critical resources in specific areas such as operations, accounting, marketing, technology, etc. to help guide the company through the challenges of an exceptional period of growth and transition.
While all of this can be challenging and create stress as the owner and private equity group partner adjust to working together, in the long run, it is important to be mindful the relationship is for the good of the company and the owner with the objective of creating more business value than the owner may otherwise be able to create without the assistance of the PEG. In other words, these “growing pains” are completely normal, but the benefits of the private equity group partnership will, hopefully, be worth the effort when the owner sells the company at a higher, more lucrative valuation in the future.
Partnering with a private equity group is a personal decision with many factors to consider. And it bears repeating: it is not for everyone. For an owner who is open to such an arrangement, however, a private equity partnership can provide a solid framework to increase the company’s value and strengthen the business for a profitable sale three to five years down the road.