Should business owners consider selling to Private Equity?

As trusted advisers our role is to find the best buyer for our clients’ business and we are, therefore, unbiased on the question of trade or private equity. However, we do urge clients to keep an open mind and to be prepared to accept challenges to their long-held views on the type of buyer that would deliver the results they want to achieve. And understanding what they really want to achieve is a vital part of the preparatory work we undertake for every client before we approach selected potential buyers.

Its fair to say that most business owners we’ve worked with over the years have a view on the type of buyer that would be interested in their business. They understand their industry and the main players and often have quite a firm opinion as to the suitability of potential buyers, even sometimes on whether they would be able to fund a deal.

But when we start to explore this more deeply to discover what they want from a sale, and sale price is just one aspect of this exploration, a number of key criteria start to appear, and priorities can frequently shift. Let me give you an example. One client was unequivocal about the type of buyer that would be successful in a transaction involving their company. After much unravelling of the underlying concerns that eliminated a whole group of potential buyers however, we were able to reassess and then agree and prioritise a revised set of criteria for a transaction – and to our client’s surprise were subsequently able to agree a sale with  a buyer that would never have appeared on their radar.

The group that was discounted, without any consideration at all, was Private Equity.

As a result, our Client:

·         Wanted to leave immediately – but actually decided to stay on and benefit from future success.

·         Had a “realistic” view on value- but having considered the future potential, actually achieved a 150% uplift on that figure.

·         Had planned to start a new, different venture – but then saw how much more could be achieved with the existing business.

What made the difference? And what, consequently, opened up that other group of potential buyers, was how our client really felt about the business and the people that had helped it succeed.

When it came down to it, the legacy that our client had created became more important than before. It also became more important to reward the key managers in the business who had contributed to its success.

Consequently, our research encompassed these variables and the eventual target list featured both trade and private equity buyers.

So, when should a seller consider a private equity approach?

Whilst the objectives of a trade buyer vs a financial buyer will have some common features – both will seek a return on their investment, although usually in different timeframes. A trade buyer will generally want to integrate an acquired business into its main business in order to achieve certain objectives. These objectives will be short term but with long term benefits.

Trade buyers will look at synergies for revenue generation and cost reduction. For example, acquiring access to new markets, new product development capabilities, technology etc. whilst reducing staff and infrastructure costs across the integrated entity.  A trade buyer will almost certainly have established teams for key functions and will seek to expedite ROI by stripping out duplicate costs.

For Private Equity buyers, they will be taking a longer-term view and will seek to create greater value, either by facilitating organic growth or through bolt-on acquisitions, and sometimes using a mixture of both.  Most PE houses look for well-managed companies with a history of consistent growth in earnings, a defensible business model and the potential for sustainable growth.

Their business is making transactions and they will make several during the course of a year. As a result, they will often complete a transaction faster than a trade buyer, who may not have dedicated M&A resources and may not be able to move as quickly.

They will look to retain key management, augmenting the team with any additional resources needed to deliver the new business plan.

As a business owner you will be considering what’s right for the business and for you and your family. Whether a trade or PE buyer is the best choice depends on your personal motivations for selling. As advisers, we can’t tell you what your priorities should be, but we can help you to explore your options and present different scenarios based on many years’ business experience.

If you would like to find out more about selling your business, please call or email me on 0118 959 8224 – kbinns@evolutioncbs.co.uk. Or why not sign up to attend one of our free Masterclass events.

About the Author

Kay Binns is Research Director for EvolutionCBS and has more than 30 years experience working at senior level in mid-market Technology, Manufacturing and Engineering companies and almost 10 years experience in the M&A industry.

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