Work Life

What will a private equity firm do after they buy your business?

In today’s global economic market, if you’re considering selling your business, you’re probably thinking the easiest way will be to find a buyer as they’re likely to pay the most money for your business.  However, there is now big money at play in private equity, meaning private equity firms have now become a popular option for many entrepreneurs looking to sell their business. This likely raises a number of questions regarding what will happen to your business if a private equity firm buys it.

A private equity firm will always want to keep you around after the sale

It’s important for a private equity firm to ensure stability, which is why they will want to keep you, the founder, around after the sale.  The firm will want you around for your ability to lead your team effectively and continue to help grow the business. A number of private equity firms will now include something called ‘earn-outs’ as part of a deal to buy your company.  Earn-outs typically tie your compensation from the sale to the continued performance of your business, so you may want to stick around…

Letting a private equity firm buy your business means you will eventually need to quit

While private equity firms will want to keep you around for a while, it’s important to remember that traditional entrepreneurial traits such as aggressive decision making and calculated risk taking don’t mix well in private equity environments.  Most firms will make data-driven decisions, which can be difficult for entrepreneurs who have ran their business based on gut instinct.

A private equity firm will likely put debt onto your business

This concept can be highly jarring for entrepreneurs who tend to be cautious and conservative when it comes to debt.  Private equity firms choose to add debt to your business as it can help them to maximise the cash return of their deal.  By putting a small amount of cash up front and then leveraging your business with debt, they are able to gain a much higher return on their investment.

A private equity firm will look to sweat your assets

While many business owners will mainly focus on their profit and loss statements, a private equity firm will look to manage everything aggressively.  A private equity firm will look to maximise everything they can using the company’s assets – particularly if this will result in additional cash. A firm will also begin to collect any money overdue from customers, as well as stretch out agreed terms with any suppliers.  A private equity firm will also look to reduce levels of inventory and turn any hard business assets into cash.

While some of the things we have touched on may paint private equity firms in a negative light, it’s important to remember that these firms are not all bad.  This is simply the way their business model operates. The best private equity firms will opt to strike a balance between the factors we touched on regarding the continued running of the business versus making extra money.  Just remember, their loyalty is to the money, not to you. If you think a private equity firm can help your business, it’s always worth getting professional advice. Top firms like Goodwin can offer help every step of the way.  Their creative approach ensures that you find the best structure and terms to achieve your overall business objectives.

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