Selling your business is one of the biggest decisions a business person can make. Handing over “your baby” is always going to involve mixed emotions and a lot of considerations – not least the kind of buyer you want to take over the business. An option we have seen some clients explore is selling to a private equity investor as opposed to a more “traditional” sale. Read on to gain an insight into the key considerations in making such a decision and the pros and cons of each option or if you want to speak to an expert contact Head of Corporate Alvin Ittoo on 01273 447075 or at [email protected] !
We assist a lot of business owners in Sussex and beyond when it comes to exiting their business, whether fully are partially. Often they are riding off into the sunset to enjoy their retirement, other times they just simply want a change of scenery and sometimes what they are seeking is an injection of capital in return for a partial sale of equity to help with growth. Whatever the reason, when a business owner has spent their time and money nurturing and growing a business saying goodbye to it entirely or even partially is one of the biggest decisions they can make. More often than not, exiting will involve selling the business and moving on and in doing so a seller needs to identify a buyer to take over the business. The more traditional route of selling to a private buyer, perhaps a business in the same sector looking to grow via acquisition, is of course a common means of selling but so too is a sale to a private equity investor, whether that is by way of a complete exit or a partial sale to help scale the business. Here we discuss what constitutes a private equity investor and the pros and cons of selling to one as a means of exiting your business.
What is a private equity investor?
Private equity investors specialise in investing in and acquiring business which are privately owned. The end game for the private equity company is to gain a return on their investment, potentially via an exit further down the line.
A private equity investor will generally have access to large sums of capital, usually obtained via various investors such as high net worth individuals, pension funds and others. This affords private equity investment companies a great deal of buying power due to their relatively easy access to liquid funds and makes for a great potential buyer depending on a seller’s priorities and objectives.
Pros and Cons
As above, there are a lot of considerations when looking to sell to a private equity investor and many of these will centre on the various advantages and disadvantages of opting for such a buyer.
A big advantage of selling to a private equity investor which has already been mentioned is their access to funding. This is a particular advantage in situations where a business owner is looking for an injection of capital rather than a full exit. In the many transactions Acumen has acted on for sellers to private equity investors this has been a key factor for the business owners and it is certainly a big plus point for businesses looking to grow and expand. The access to this capital makes a private equity investor perfect for a business owner looking to sell a number of shares in their company in return for the cash injection to take their business to new heights.
Another advantage for a selling business owner is the access to professional expertise, industry experience and connections which would not otherwise be available but for selling to a private equity investor. Again this is of particular significance to a business owner who has taken their business so far and is looking towards that next step. Private equity investors will often seek to appoint board members who may bring a very different skill set to a business to those offered by the existing owners. Often these board members have significant experience in strategic decision making in order to grow a business. Similarly a private equity investor could bring a number of key industry specific contacts and expertise to the business. Again, where a business owner’s objective is perhaps not to exit immediately but rather to grow the business for a future sale a private equity investor and the experience and expertise it brings could be perfect.
Finally, the very objective of private equity investors, namely to maximise returns on their investments, is a crucial advantage for a business owner looking to sell part of their business and retain a percentage. Any private equity buyer has a keen interest in expanding and growing the business in order to increase its value and thus the value of their investment. This means that a business owner selling to a private equity firm can benefit from their input on strategy and planning for a well-executed exit in the future. For the business owner who retains a stake in the company this can only serve to maximise the value of their shares on exit.
What is apparent is that a private equity buyer is certainly an attractive proposition to a business owner looking to sell part of the business with the objective of further growth. This does not mean that a business owner looking for a complete exit should not consider a private equity investor, albeit often such an investor would want to retain the know-how of the business owner and thus may be reluctant for a full buy-out. A private equity buyer will always be one who will have access to significant capital and so any business owner looking to sell would be well placed to at least consider any potential private equity investor buyers.
Of course, just as there can be no Batman without the Joker there are inevitably disadvantages to counteract the clear pros of a private equity buyer. One of the biggest of these is the loss of influence and control a business owner may suffer when selling to a private equity buyer. When a private equity buyer purchases a stake in a company, it is very common that they require the founders to seek consent or at least consult on key decisions for the business. This is to safeguard their investment. This may be fine for some sellers who ultimately want to reduce their workload and commitments but to a business owner who still wishes to run their business but just wants a financial backer to help achieve their objectives, this can be a jarring consequence of a private equity sale, particularly where the business is an owner run company where the founder has always taken decisions unilaterally.
Another disadvantage is that a private equity buyer may not be the best option for a business owner looking for a completely clean break. Depending on the business, a private equity buyer may well wish to keep the founder owner involved in order to ensure the business thrives. This is a clear example of where a seller must consider its options by reference to its objectives.
Private equity buyers typically operate with a focus on the short-term with a view to increasing the value of a business and achieve quick gains on the investment. This can compromise long term planning and some sellers may not be happy with this approach. Similarly, the timelines for a full exit will often not be aligned between a private equity company and the business owner. This is because the private equity investor is seeking a swift exit with the best return whereas a business owner who has sold off part of the company may want to take things slower when working towards a full exit.
Finally, any selling business owner who prioritises their business legacy should think carefully before selecting to sell to a private equity investor. The preservation of the businesses legacy and the emotional considerations of a business owner who grew the business from nothing will not be priorities for a private equity investor and so a traditional sale to a well vetted private buyer may be a better option for sellers who have this as a key priority.
This is just a brief precis as to the various pros and cons and considerations but hopefully what is apparent is that the decision as to who to hand the reigns of your business to should be taken carefully after examining your key objectives and priorities. These will include financial factors, such as the need for a quick injection of funds, emotional considerations such as questions over the businesses legacy and thoughts around the objectives for the business in the future. These various questions are ones which Alvin Ittoo and his corporate team at Acumen have often helped clients answer when looking to sell and it is clear that taking early legal advice from those who specialise in these types of transaction can help you as a business owner to make a decision which is well informed.
We believe it is never too early to start seeking expert advice and input when it comes to exiting your business, whether via private equity investment or otherwise. To learn more about exiting or selling your business contact Head of Corporate, Alvin Ittoo at [email protected] or call 01273 447075.
