Private equity partial exit

So your client has spent the last 5, 10 or more years building up their business. They should feel pretty comfortable, but all their wealth is in the business and the mortgage or school fees still loom large on the wrong side of their personal balance sheet.  But there is so much more opportunity, so they are not yet ready to sell.  Is there something in between?

Well… it would be a short article if there wasn’t, so the answer is yes… private equity!

I realise that for a lot of people, private equity conjures images of the devil in a smart suit. And I certainly can’t vouch for everyone in the private equity industry, but for those firms that operate at the lower and mid-market level, they are lot more like us than you would imagine. Many of them have spent their careers working with, or running SMEs, and they are passionate about building businesses. Of course they want to make money, but if the deal is structured in the right way, they make money alongside their management teams, not at their expense.

How does the deal work?

With so much potential left in the business, your client doesn’t want to sell it all today. Very few corporates would consider buying anything less than 100% of the business. And if they do, it will be tied into a pre-agreed price or formula for the balance of the shares at some future date, which may or may not give much upside at that point in time.

With private equity it is possible to split this process into two steps, by bringing them in as a partner for maybe 40-60% of the business for this transaction. Then they support the business to grow in partnership with the management team.

The key things they will look for are:

• A good quality business, well run with a good management team;
• An attractive sector with good growth opportunities, either organic, or through consolidation;
• A well thought through business plan as to how the business can capture those opportunities.

What will they be like as partners?

Your client will obviously need to work with the private equity house, it will be a partnership.  Yes this means they have less control, but it also means they have access to the support a PE firm can offer. They won’t just sit back and enjoy the ride. They will take an active strategic role in the business, and can help in a number of ways…

Access to additional funds: They are a strong financial partner who can provide additional funding for perhaps an acquisition or an expansion of a facility.

Better banking support: Getting a bank to support a privately owned business can still be a challenge, but with a private equity backer this is an easier discussion.

Help with recruiting and succession planning: Your client may want to add key people to their team, or they may want to develop a succession plan for themselves. In both cases private equity houses have their own networks of recruiters and individuals which can often give access to better quality candidates.

Operational discipline: your client (with your help of course!) might run a fantastic business, and while the PE firm won’t take over day to day control, they will provide valuable insight and advice from a position on the board.

Drive the next exit: they don’t want to be investors forever, so they will take the lead in generating a sale, with the best possible return for all shareholders (your client and them), usually in a 4-5 year timeframe. And as far as your client is concerned – if they have a succession plan in place they can also exit at that point, or they can stay on for another cycle with a new owner.

So is it an option?

What this can offer your clients is a stepping stone.  Rather than ask the questions “Do I stay as I am and run the business on my own, or do I sell?”, this offers a third way.  Sell some today, and benefit from the support to grow, delivering an enhanced valuation in 4-5 years time.  Private equity doesn’t suit all businesses. But if your client has a robust business with an exciting growth plan, but just want to share the risk a little, they should give private equity a thought.

Please do get in touch if you want to discuss whether it is suitable for any of your clients.