Not-So-Silent Partners: A Comprehensive Guide for Selling Your Business to Private Equity

Selling your business is one of the most important decisions you will ever make, but what about selecting to whom you will sell your business? Usually, that choice is just as important—if not more so.

As a devoted business owner who wants the best (and the best price) for your company, you may be considering selling to a private equity group (PEG). Yet most PEGs will require you to retain minority ownership in the business, leaving you in close partnership with this particular type of buyer for some time to come.

So before you decide on selling to a PEG, ask yourself the following crucial questions—and be sure you’re fully satisfied with the answers.

What do I know about the PEG’s track record?

Start by evaluating the PEG’s background in acquiring and managing companies. What can you learn about the PEG’s approach? What evidence is there of its successful acquisitions and value creation in the past? Whether the buyer brings the right expertise for your business could mean the difference between a lucrative transaction and a serious disappointment. Examine the following elements of the PEG’s track record:

• Industry experience. When researching potential buyers, look for a solid acquisition history that is relevant to your industry or a related sector. Developing industry-specific expertise can lead to better decision-making and more effective post-acquisition strategies. PEGs often specialize in a particular field, positioning them to better assess investment opportunities, identify growth potential, and add value to portfolio companies.
• Geographic focus. PEGs also may demonstrate geographic preferences. Some concentrate on investments within a certain region or country, while others exert a global reach. Determine whether the potential buyer’s geographic focus aligns with your business operations and growth prospects.
• Size and stage of past acquisitions. PEGs may target companies of a certain size or at a particular stage of development. Some specialize in early-stage startups; others gravitate toward mature companies. A potential buyer’s investment criteria should match your company’s size and developmental stage, as this can affect both the PEG’s valuation and its post-acquisition plans.

Is the PEG a strategic fit for my company?

Next, assess whether the potential buyer’s long-term strategic goals align with your company’s purpose and aspirations. Understanding the PEG’s vision for your business is essential. How does the buyer plan to drive growth and expansion? Does it possess the vision required to execute those plans effectively? Reflect particularly on the following factors:

• Risk tolerance. PEGs vary when it comes to risk tolerance. Some may prefer conservative, low-risk investments, leaving the potential for greater returns to other PEGs that are more willing to take on high levels of risk. Appreciating the risk appetite of a potential acquirer can help you gauge its interest in your business and the terms it may offer.
• Portfolio diversification. Is the PEG’s existing portfolio diversified across industries or heavily concentrated in a single sector? Seeking a buyer with industry-specific expertise (as recommended above) is not the same as settling for a one-trick pony. A well-diversified portfolio may indicate a more stable and balanced approach to investments.
• Value proposition. PEGs often present a unique value proposition to portfolio companies, including access to their network, operational expertise, and resources for growth. If the potential buyer can bring specific value-add capabilities to your business, factor that into your calculation.

How should I perform thorough due diligence on the PEG?

Conducting thorough due diligence on a potential buyer is an absolute must. Examine the PEG’s capital management, past investment performance, and current capabilities. Does it have the necessary resources to support your company’s growth? As you scrutinize the available information, pay close attention to the following:

• Financial stability. Assessing the PEG’s financial stability includes examining its primary and secondary sources of capital, fund size, and available liquidity. A financially stable PEG can more reliably support your company’s growth, provide necessary resources, and weather economic downturns.
• References. Speak with former business owners who sold their company to the PEG. Did the acquirer stick to its word after the transaction? Collecting firsthand experiences and insights from these references can provide valuable perspectives that will help you make an informed decision.
• Operational capabilities. Evaluate the operational capabilities of the PEG. Does it have a dedicated team of professionals with expertise in areas that are relevant to your business? Having the necessary industry knowledge can make or break the transaction, especially if your company operates in a highly specialized industry.
• Red flags. Take very seriously any red flags or warning signs that pop up during your due diligence. Significant issues or inconsistencies in the PEG’s history or operations may be cause for concern.

How much control of the business will I retain after the sale?

Determining your level of post-acquisition involvement in the business is a crucial step that you must take before proceeding with the transaction. Understanding the proposed organization of the future company is the only way to be reasonably sure whether the PEG’s management style and approach will align with your expectations. Be sure you and the potential buyer are on the same page in terms of the following:

• Decision-making processes. Ascertain how decisions will be made within the hierarchy of the “new” company. Which decisions will require board approval? Will you have a say (or even veto power) in things that are important to you? To avoid a long string of conflicts and misunderstandings, gaining clarity on these matters upfront is essential.
• Governance structure. Examine the proposed governance structure that will be in place post-acquisition, including board of directors composition, allocation of voting rights, and any specific control mechanisms. Be aware of any changes in governance that may affect your ability to influence strategic decisions.
• Transparency and communication. Establish expectations for transparency and communication. Determine how and when you will receive updates on the company’s performance, financial results, and strategic initiatives. Clear communication channels can help maintain trust between you and the PEG.

How will selling to a PEG impact company personnel?

Don’t overlook the impact that a potential sale to a PEG will have on your workers, from the C-suite down to the factory floor. Discuss upfront the PEG’s approach to the current and future workforce, keeping in mind the following points:

• Management and employees. What exactly will the transaction mean for your leadership team and staff members? Assess what you know of the potential buyer’s history—especially whether it tends to retain and develop talent or implement significant changes in personnel.
• Incentives and equity participation. Be sure you understand how the PEG plans to address talent management and incentivize employees. Some PEGs offer equity participation or performance-based incentive programs to motivate and retain key employees. Inquire about the specifics of such programs.
• Impact on staff. Consider how the transaction will affect your employees beyond the management team. Assess whether there may be changes in staffing levels, roles, or responsibilities—and how you expect to deal with those changes.

What level of support will the PEG provide after the acquisition?

Evaluate the type of post-sale support the PEG anticipates it will provide. Understand how the buyer will work with you to achieve the shared goals of the business, including in the following areas:

• Strategic vision. Determine the PEG’s expected level of involvement in strategic planning. Some PEGs take an active role in shaping the acquired company’s strategic direction, while others prefer a more hands-off approach. Clarify how such decisions will be made and whether you will have a say in the strategic vision for the business.
• Collaboration. Be aware of how the PEG plans to collaborate with you and your team, including on instituting operational improvements. Will there be regular meetings, a joint decision-making process, or shared responsibilities for specific aspects of the business?
• Access to a network. Assess the extent to which the PEG can provide access to its network of industry contacts, potential customers, suppliers, and other valuable resources. A well-connected PEG can open doors to new business opportunities.

Do the PEG’s values and culture align with my own?

Consider the reputation of the PEG and its approach to corporate governance. Confirming that your company and the potential buyer are on the same page culturally can significantly impact the overall success of the partnership. Appraise the PEG in terms of the following:

• Legal and ethical conduct. Ensure that the PEG has a history of straightforward legal and ethical conduct. Look for any past legal or regulatory issues that could raise concerns about its business practices.
• Values alignment. Judge whether the PEG’s values and corporate culture align with your own. A cultural fit can promote a smoother transition and integration process, and will reduce the likelihood of conflicts between the two organizations.
• Leadership style. Determine whether the PEG’s leadership style and corporate governance match your expectations and comfort level. This is particularly significant if you plan to remain involved in the business going forward.

Does the PEG’s exit strategy support my objectives?

Don’t hesitate to ask questions about the PEG’s typical investment horizon and exit strategy. Evaluate its plans for the future of your business, whether it involves a potential sale, an IPO, or other avenues for value realization. In particular, contemplate the following topics:

• Investment cycle. PEGs typically have a predetermined investment horizon that varies based on the fund’s structure and strategy, ranging from a few years to a decade or more. Ensure that the potential buyer’s timeline aligns with your own objectives.
• Exit triggers. Understand the circumstances that would prompt the PEG to pursue an exit. Exit triggers could include achieving specific financial targets, market conditions, or other strategic considerations.
• Transition period. If the PEG’s exit strategy involves selling the business, discuss how the transition will be managed to ensure a smooth handover to the new owners.

Are the financial terms of the deal acceptable to me?

Pay close attention to the financial terms of the deal. Work out the valuation methodology that will be used, the purchase price, and the structure of the transaction. Assess the PEG’s expectations regarding future returns and (as mentioned above) its plans for potential exit strategies.

• Minority vs. majority stake. Is the PEG interested in acquiring a minority or majority stake in your company? The answer to this critical question will greatly affect your level of ownership and control post-transaction.
• Classes of stock. Identify what class of stock will be offered:
  • Preferred stock brings specific privileges, such as priority in terms of dividend payments or liquidation preferences.
  • Pari passu conveys equal rights with common stockholders, so they will share equally in dividends and distributions.
  As you weigh the financial implications of selling your company to a PEG, understanding the hierarchy of stock classes is essential.
• Earn-outs and performance metrics. If part of the deal involves earn-out provisions (where you receive additional payments based on the company’s future performance), ensure that the metrics and targets are clearly defined and achievable.
• Financing structure. Be familiar with the financing structure of the deal. PEGs typically use a combination of equity and debt, so reflect on how this may affect the company’s financial stability and growth prospects.

Which legal and M&A advisors are best suited to guide the transaction?

Finally, seek advice from experienced legal professionals and investment bankers who specialize in mergers and acquisitions. They can help you navigate the complexities of the transaction and secure the best possible outcome, especially by applying their unique expertise in the following areas.

• Negotiating terms. Skilled legal and M&A advisors will be prepared to review and negotiate the terms of the deal on your behalf, including purchase price, earn-outs, management incentives, and any ongoing role you may have in the company.
• Handling the due diligence process. Now that it’s the acquirer’s turn to perform due diligence, you’ll want to seek out experienced legal and banking professionals to help prepare you for this process, which can sometimes be intense. The PEG will assess your company’s financials, operations, legal matters, and more. Be transparent and provide the necessary information promptly—another point on which capable financial and legal advisors can help significantly.

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Selling your company to a private equity group is a major decision that no responsible business owner takes lightly. The transaction can have long-lasting implications, and the results can be rewarding—as long as you carefully evaluate all aspects of the potential partnership to ensure the best fit for your business and your stakeholders.