Q&A: Selling Your Business to Private Equity
Private equity offers a succession plan to business founders and owners so they can transition to a new phase of their lives. Yet, so much about private equity and the process of selling to a private equity firm remains a mystery, or shrouded in stereotypes and misperceptions. In this article, Borgman Capital’s Founder and CEO, Sequoya Borgman, answers frequently asked questions about private equity as an exit strategy.
Answers to business owners’ most frequently asked questions about private equity as an exit strategy.
When people think about private equity a lot of people think about what went on in the late ‘70s and ‘80s with Barbarians at the Gate and Wall Street and big firms coming in and tearing up nice companies. While unfortunately those stories are true, that’s not the industry now. That is not the space we operate in, and that is certainly not our style. The type of transaction we do – leveraged buyouts – is just one exit strategy available to owners and founders so they can transition to the next phase of their lives. We are focused on acquiring successful, established businesses that have been around for generations, and continuing to grow those businesses. A negative stigma of private equity firms is often their lack of humanity. We want nothing more than for our companies and their employees to continue to be successful.
The private equity industry has battled negative perceptions for a long time. What is the reality of the industry today?
We operate in the “lower middle market,” defined as businesses with less than $100M in annual revenue. We are typically working with a business owner or founder who is nearing retirement age and doesn’t have an obvious successor. Maybe the next generation doesn’t want to take over because they have other professional pursuits, aren’t qualified or simply don’t have an interest. In other cases, senior management could be the ideal buyer but they don’t have the financial resources. In that situation an option is to have a private equity firm back the management team. There are often management incentives - such as equity in the company - to keep high-performing management around and reward them for future success. We also transact with sellers who want to stay involved but are seeking additional capital, resources and/or expertise to grow the business.
[For more on this topic read our article: Selling Your Business: Understanding the Buyer Landscape]
Is there a typical type of business that sells to private equity?
In addition to getting to know the seller’s specific situation and his or her reasons for seeking a liquidity event, we want to learn everything we can about the business. We want to get in the weeds. Borgman Capital is industry agnostic and opportunistic when it comes to what we’ll evaluate, but there are some universal threads. First, we are looking for established, profitable businesses with a business model that we understand. Second, we want to clearly envision how we can add value organically and/or by adding on similar businesses, or through some sort of competitive advantage. Third, it’s all about leadership succession. Who is going to take the founder’s place and fill his or her very big shoes? If the founder or owner plans on transitioning out of the business, we utilize our network to find the company’s next leader who will be a culture fit. This is so crucial because our philosophy is to not micro-manage. We are there to support strategically, open more doors, and empower our management teams to lead and grow the business. In my experience, leadership is the number one differentiator between a successful business and one that is not.
[For more on our investment criteria, click here.]
What does Borgman Capital look at when evaluating a business?
We have experience working with sellers who have stayed involved for a short transition period while we identified a new leader, sellers who stay involved in a board member capacity, and we have experience working with the founders of a company who want to stay involved for the foreseeable future. It depends on the seller’s stage of life, and their goals and reasons for selling. If the seller is someone who wants some strategic help and additional capital to continue growing the business and they’re still committed and energized, he or she will typically roll over a lot of equity, stay involved in the business and continue to run the business. If the seller is someone closer to retirement, wants to close their chapter completely and take chips off the table, they’re less likely to stay involved with the business longer than a short transition period. Any of these scenarios are normal, which is why it’s so important that a seller understands their goals and reasons for selling when starting a conversation with a buyer.
Does the owner/seller typically stay involved in the business after a sale to Borgman Capital?
There is a lot of preparation that needs to happen. My advice is to plan ahead. Educate yourself on the different sale options, including selling to a strategic buyer, a private equity firm, management, or employees. Start thinking two to five years before you want to exit about professionalizing your business and leadership team, institutionalizing your knowledge, and handing off responsibilities to others. A major pitfall we see is owners who have micromanaged too much, walk out the door upon retirement and haven’t passed their knowledge on to the right people. The better you do at transitioning your value into other talent, the more value you’ll create for your business when you are ready to sell. This pre-exit time period also the best time to make investments in any technology or system upgrades to raise the value of your company and increase your margins. Finally, while you are planning ahead, remember that it can take between six to nine months to sell a business, but can be faster or slower based on many different factors.
What is your advice for owners thinking about selling, or planning for retirement and considering an exit?
There are a lot of ways to source deals, and we use all of them. We look at 1,200 to 1,500 of companies per year and ultimately invest in two to four. The best deals come to us through our network. People we know introduce us to a business owner, we get to know each other and align on the vision for their business, and we are able to agree to terms on the transaction. We also have strong relationships with investment bankers and brokers who focus on the lower middle market and are an integral part of our deal flow.
How do private equity firms find companies to buy?
Ask about their plans and ideas for growing the business. How will you take care of my employees? How will you support the local community? Over my career in M&A I’ve found that selling a business is 80% relationship-driven and 20% financially driven. You know when someone is telling you what you want to hear versus what you need to hear. Partner with a private equity team who is straightforward with expectations, who shares their knowledge, and who invites you to speak with sellers of their portfolio companies. At the end of the day there are lots of exit options out there; remember that you’re in the driver’s seat. You get to decide who you want to sell to, and if you want to sell at all. If you are a business owner considering private equity as an exit strategy, get in touch with us for a conversation about your goals, your business, and how our approach may be a good option for you.
I’m a business owner considering private equity as an exit option. What questions should I ask?