Vet private equity before you sell

December 1, 2015

By Scott Bushkie, CBI, M&AMI

Cornerstone Business Services, Inc.

In M&A terms, a recapitalization is a sale in which the owners keep a percentage of the equity (around 30 percent) and continue to play an active role in the business.  As a seller, this gives you an opportunity to retire your debt, get rid of personal guarantees, take some chips off the table and diversify your assets.

When you’re selling a business outright, the ideal buyer is often a synergistic business. But a recapitalization, on the other hand, tends to line up much better for a private equity group.

Many private equity groups (PEGs) don’t want to run the day-to-day operations. They want a proven management team ready to take the business to the “next level.”  The PEG provides the capital, connections, and expertise to facilitate that growth.

As with any industry, not all PEGs are the same. Here are some questions your advisor should be asking:

What fund cycle are they on? It will be harder to judge a PEG in its first round of funding.  But if the group has had good success in the past, then it will be easier to attract investors for a second round.

More specifically, find out the PEG’s track record over its last five business sales. How many did they grow and how many businesses lost money or broke even?

Another question I like to ask is how many indications of interest or letters of intent (LOIs) do they have out to would-be-sellers.  I was vetting buyers recently for a client in Wyoming, and I asked this question to our four best candidates.  One private equity group had 15 outstanding LOIs, and one had only one.

We felt much more comfortable moving forward with the latter group because we knew they didn’t throw out LOIs indiscriminately. They were more selective and more likely to be a serious buyer.

Along the same line, ask about their success ratio from IOI to close. Do they put out 10 indications of interest and close just one?  You want to work with a group committed to getting deals done.

Finally, do your research and try to understand the PEG’s management philosophy.  Some groups tend to micromanage and can bury you in financial reporting.  Other groups truly act like active board members, just a phone call or a flight away from helping out in any way they can.

With the right partner, you can take off a lot of hats and focus on what you do best. When everything works as it should, that 30 percent equity you kept should be worth as much, if not more, than the 70 percent you sold five years earlier.

And during those five intervening years, you’ll have less stress, less risk, your assets will be diversified, and you’ll get to do more of the things you like to do.  Not a bad deal.

Scott Bushkie is President of Cornerstone Business Services . To request a book (at no cost) with advice on the exit planning process contact Scott at (920) 436.9890 or sbushkie@cornerstone-business.com. Copyright 2013.