Ep #041: Know the Game You're Playing: Insight into Private Equity

Introduction

"On this episode I want to share some insight into the Private Equity space when selling a business because there are so many traps and mistakes that can be made. I’ll share my personal experience as the Financial Planner and Exit planning advisor working with clients as well as insights I’ve gathered from talking and working with experienced M&A advisors, CPAs, and attorneys."

Know the Game You’re Playing

"The first thing is know the game you’re playing. Specifically for today the private equity game. Private Equity Firms have done hundreds if not 1000s of deals with buying businesses and for many owners selling their business, will be the first time going through the process so private equity firms have a huge advantage, especially if a business owner does not have a trusted wealth advisor that’s in your corner, that knows your goals and what you are trying to accomplish. I call this person your financial quarterback because they look out for your best interests and are able to bring in key players that have the experience and motivation to get you the best deal."

Private Equity Traps and Mistakes

"Remember, if someone approaches you interested in buying your business, you will get to a point where you sign a Non-Disclosure Agreement, your business is valued, and an offer is put out to you. That will be the ceiling for the value of your business and from that point on, due diligence starts, and Private equity or any strategic or financial buyer will try to knock down your valuation as much as possible by finding gaps and weaknesses in your business."

"They are notorious for taking your eye off the ball, getting you exhausted to the point where you get distracted and solely focused on the sale, and the amount of money you can potentially make. And you lose focus on your business. What happens is your revenue drops for a quarter or two and Private Equity comes back and says wait your revenue dropped, we have to adjust your valuation. They want to drag out the process and tire you out so you get to the point where you just want to get the deal done. So be in the mindset where you have no problem with walking away early in the process because this will put you in a better negotiation position."

Be prepared to walk away

"I’m working with a business where they had a Private equity firm reach out, we had an introduction call and they are interested in learning more about the company so they wanted to schedule a second call to learn more about the financials and have my client sign an NDA. We pumped the brakes a little a bit and decided to go a different direction and we are now exploring bringing in another firm that specializes in valuations and value enhancements because we want to be as prepared as possible before engaging with a private equity firm and any deal structures. So being able to walk away gives you a ton of leverage."

How private equity works

"Now Private equity isn’t all doom and gloom, there are just a ton of traps and mistakes that can be made but if it all goes well, working with a private equity firm can give a business owner a second bite at the apple. Essentially having two exits. Here’s how this works."

"A private equity firm will come in and want to acquire a majority share of your business, greater than 50% so they have ultimate control. Their goal is to then fix up the business and resell it for a profit 3-5 years later down the road. This is no different than someone buying a house really cheap and then fixing it up to sell it for a profit."

From the business owner’s end they end up selling 60-70% ownership of the business in the beginning and then stay on board for “x” number of years until the remaining ownership of the business is sold (which is the second exit and when “you get a second bite at the apple”) Because in some cases after the business is cleaned up, the second liquidity event can be more financially rewarding than the first. So Private Equity can be extremely financially rewarding depending on what you are trying to accomplish. The main point for this episode is understand and know the game you are playing so you can avoid making unnecessary mistakes and instead have a successful exit."