These steps will help whilst selling your business to a private equity firm

You are selling your business to a private equity firm and you want it to go smoothly. As you enter the “Lion’s Den” you should be prepared. Doing business with a private equity firm can be an advantageous decision if you are prepared for the negotiation process. Selling your business is an exciting and complex process so having a plan in place is beneficial.

Here are several key points that might make what could be a long, arduous process easier, and result in a positive ending for all parties.

What Is Your Business Worth?

There is often tension when selling your business to a private equity firm. The seller naturally has a higher valuation of the business than the private equity firm, causing friction in the transaction.

Have you established a “range of values” for your business?  Before you begin the “mating dance” you should consider engaging a valuation expert or investment banking firm to advise you on a range of values. These experts help you evaluate the current valuation landscape and will be able to share information about similar transactions to see where your business value is positioned.

As you develop a financial picture that tells a compelling story, the appraisal of your business can be used to maximize value and develop a framework of ranges. It also explains your financial strategies and highlights why your company is appealing to a private equity firm.

When selling your business to a private equity firm, consider immediate and long-term financial goals, as well as the goals of all its investors and management team.

A private equity transaction will traditionally allow a seller a minority stake in the business. A seller should understand a buyer’s planned ownership horizon, the private equity firm’s ultimate exit plan for the business, and how that fits in with the seller’s post-sale vision and total compensation.

The seller’s team should have a united vision of financial goals so they can present it in a clear and concise view to the private equity firm. The seller should also understand they will be required to make additional capital contributions as the acquired company grows by future acquisition.

Management and Company Culture

Business owners often pride themselves on their company culture. Upon a sale to a private equity firm, that culture may diminish or wash away. Before you sell your business to a private equity firm, you will want to ask these questions:

  1. Where will the company fit in with the private equity firm’s plans?
  2. Is this an initial platform investment where the private equity firm will allow the seller to keep the management team in place?
  3. Will the private equity firm keep the company entities intact and simply add it to its portfolio?
  4. Will the private equity firm be putting in its own people to lead the company?

Very often after the “honeymoon period” there can be a clash of culture occurs. As you sell your business to a private equity firm, take time to meet with those people who will play an integral part of the business going forward and seek to have input into the selection of future key personnel.

Revenue, Regulations, Due Diligence

As one private equity firm officer stated, “My job is to find out everything about you, your team, and your company. If I find that you did not tell me something, I will dig deeper and deeper until I am sure that I know everything.”

With that mindset, the private equity firm and its team of lawyers, accountants, and industry consultants will review every conceivable aspect of your business, which might result in a reduction of the purchase price.

The due diligence process can be exhausting. This stage of the deal has the potential to kill the transaction. The due diligence process can be extremely distracting and all encompassing. This sales process takes management’s focus away from operating its business, which is the real obligation of the management team.

There is nothing more troubling for a buyer than seeing financial performance below budgeted expectation. A seller and its team need to be able to maintain focus. The response to due diligence questions must be well thought out, as question after question leads to further questions and inquisitions.

Expert Council

To reduce the stress associated with selling your company to a private investment firm, a seller should begin the exercise of diligence as early as possible. You should engage expert outside advisors who have knowledge of your industry to help you manage the process.

Before you open up the due diligence barrage of documents, make sure your team has vetted them and you have had a detailed discussion of any critical issues that affect your business, such as regulatory issues, taxes, and revenue recognition.

A seller and its team should carefully evaluate any sensitive pressure points and how they may present themselves in the diligence process. You should have a detailed response prepared for those sensitive issues and should carefully consider them for discussions with the private equity group and its advisors.

A private equity firm team is always comprised of a skilled group of professionals who find the stress points and drill down. Ensure the information presented is responsive to the due diligence request and delivered in an organized manner.

Quality of Earnings

Most serious buyers will ask the seller to complete a quality of earnings. A Q of E reviews your financial statements in a way that is different from an audit.

It’s inevitable that the accounting firm will find various adjustments. However, a seller can save time and potentially purchase price adjustments if they trump the buyer and perform their own Q of E analysis to find unusual items or other items that the buyer may question.

Your own Q of E may even discover items that can increase your business’ value. It will be much more efficient to be prepared up-front than to have to scramble to understand the questions and offer satisfactory explanations to the private equity firm.

Selling your business to a private equity firm can be a full-time job. If you make proper effort to communicate and be prepared for the peaks and valleys associated with the journey, you can often reach your goal.

Joel Mayersohn, a member at Dickinson Wright, focuses his practice in corporate, securities, and business law. He advises a diversified client base in private placements, public offerings, mergers and acquisitions, financing transactions and general securities, as well as corporate law matters. He also has experience in venture capital, going private transactions, bridge loans, and pipe financings. He can be reached at jmayersohn@dickinson-wright.com.