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Unlocking Capital: Selling to Private Equity

Selling to private equity

For many small and medium-sized businesses raising capital from the public markets remains out of reach. Instead, companies are turning to private equity firms as the industry evolves and assets under management top nearly $12 trillion, according to McKinsey.


A private equity firm can be a formidable ally that provides the financial support and expertise needed to scale operations, penetrate new markets, or optimize existing processes. However, only some companies are the right candidates to receive private equity funding. Understanding the pros and cons of selling to private equity is important before deciding whether they are the right partner for the next stage in your company's journey.

Private Equity Fundraising: Understanding the Playbook

Delving into the inner workings of private equity firms requires careful analysis of the factors that shape their investment decisions. A business's attractiveness to these firms hinges on several key features:


Financial Strength: Firms generally seek a company with a track record of robust financial performance, showcasing consistent revenue growth, healthy profit margins, and meaningful growth opportunities. Employing financial leverage in acquisitions is a common tactic firms use to improve returns. The confidence to do so relies on the business having sufficient cash flow to effectively cover all interest and principal payments. A company must generate free cash flow to be considered the right fit for private equity.


Market Positioning: Whether you are the leader in your geographic market, a specialist in a specific vertical or a generalist with unique systems and processes, having a competitive edge can significantly influence your appeal.


Leadership Team: A capable, adaptable, and incentivized management team often serves as a decisive factor. Private equity investors keenly assess the leadership's ability to execute growth strategies and navigate market shifts. The preference is to keep the management team intact and provide a compensation structure that pushes the team to reach new heights. If the founder wants to slowly transition out of the business, having a deep and experienced team is fundamental to receiving private equity support.


Growth Opportunities: When it comes to growth, it is essential to understand how private equity firms work. Firms will often put companies into one of two buckets. Can you potentially be a “platform” acquisition, meaning can they use your business as a base for which they can add further acquisitions? Alternatively, your business might be a complementary tuck-in acquisition for one of its platform investments. In both scenarios, they want to see an opportunity to grow within the current customer base, take market share in the industry, or add new products and services.  

Selling to Private Equity: Choosing a Partner

Selecting the right private equity partner is a difficult decision whether you’re selling your business a minority or majority equity stake.


First and foremost, it starts with having shared goals and values. The alignment of investment philosophies and vision for the business needs to be adequately articulated and communicated. Though tough decisions will be made that require a hard look at the team and strategy, having the same values will make those conversations easier. A firm will perform extensive due diligence on you during the private equity funding process, so you should perform your own due diligence on them. Do they have a proven track record? What do people who’ve worked with them have to say? Do they have the industry expertise to be helpful? Partnering with a seasoned team with relevant experience, a robust network, and a history of success are important considerations.


A lesser-known issue that could impact a transaction revolves around where the private equity firm is in its fund lifecycle. A conventional private equity fund has three cycles. The first phase is the investment period. This is where the fund is deploying capital in companies. The second phase is the build, manage, and enhance stage, where the team is making additional acquisitions and investments to scale the company. Lastly is the harvesting period. Investments are sold during this time, and cash is returned to investors. Knowing where a fund is in its lifecycle can impact its timeline and commitment to you. If the firm buys your business in year four of a seven-year fund, it could be looking to sell quickly. Ensure that the fund timeline aligns with your exit strategy and the company's goals to avert any potential conflicts.

Raising money from private equity

Business Strategy: The Next Evolution

Private equity funding often catalyzes substantial shifts in a company's strategic direction. While it could be mere operational fine-tuning, other enhancements are also possible. There will undoubtedly be a more watchful eye on optimizing processes to drive profitability. Monthly, quarterly and annual meetings with defined revenue and profitability targets are common in private equity.

Selling Your Company to Private Equity: Navigating the Exit Strategy

Planning the exit strategy remains a pivotal phase for the company and the private equity firm. As mentioned earlier, it is rarer in today’s economic environment to see firms taking a company public. We are seeing fewer and fewer companies choose this option unless they are a meaningful size.


Companies that can sell to a strategic buyer often get a premium valuation on exit due to the operational cost savings involved in this type of sale. Alternatively, private equity firms might offload their stake to another investor, whether from another private equity entity or an institutional investor.


While securing capital from private equity firms remains a strategic move for businesses eyeing substantial growth, navigating this terrain demands meticulous planning and astute decision-making. By understanding private equity criteria, selecting compatible partners, adapting growth strategies, and planning exit routes, business owners can unlock their company's full potential.


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