There are several different types of buyers in the business marketplace, including strategic buyers that are able to realize synergies through the purchase of your business, and financial buyers, such as private equity firms (PEFs) that are looking to invest in businesses to get a healthy return on their money. While some financial buyers will want to buy 100% of your business, others will buy a controlling share and allow you to maintain some ownership as well. This may pave the way for you to get the proverbial “second bite of the apple” or a second payout, when the business is sold again in the future.

How it Works

Financial buyers are not able to realize synergies like strategic buyers, and they generally invest in companies with an existing management team in place, employees, and an overhead structure in order to run the business. They may even want you to stay on for a period of time, even if you no longer own any percentage of your business. They usually will not pay as much as a strategic buyer for your business, but if you can demonstrate that your business is capable of significant future growth with the right level of capital investment, they will pay you a solid price.

Occasionally, sellers who maintain some ownership in the company will receive a second payout when the company sells again, as we mentioned – “a second bite of the apple.” However, due to the amount of variables involved in growing and selling the business again, sellers should not count on a second payout but view it more as a bonus if it happens.

Selling to a private equity firm may sound like an attractive option for business owners, and it can be under the right circumstances, but there are also several things that sellers need to know before pursuing it. A 2014 article “Equity-worthiness and equity-willingness: Key factors in private equity deals,” published by the Kelley School of Business, Indiana University, indicates that “less than 3% of pre-negotiations between privately held companies and PEFs lead to a closed deal. This means that the process is exacting; roughly 97% of negotiations initiated by PEFs collapse.” It is important for business owners to understand what makes a company an attractive target for private equity firms and what goes into making a deal successful.

What Private Equity Firms are Looking For

PEFs are looking for good investment opportunities that are “equity-worthy” and will produce solid returns for investors when the company sells again after a few years. They expect that the value of their stake in a company will increase significantly as result of their investment that increases capacity, provides complementary resources and capabilities, and improves corporate governance and control systems.

When scouting for targets, PEFs aggressively search for companies that meet their criteria via database queries, web scraping, social media, business meetings, and expert networks. One particular area that the above article sites as an often overlooked area is a company’s website. If a company’s website is not user-friendly and does not provide adequate insight into the company, it may make it less attractive to potential PEFs right out of the gate.

During the process of screening their potential targets, PEFs look for the most interesting privately held firms based on various criteria, such as “industry, geographic area, the firm’s profitability and growth potential and competing products or services. PEFs assess individual firms’ strategic profiles and growth opportunities, evaluating whether and how they can strengthen their competitive positions.”

What Owners Can Do to Increase Their “Equity-Worthiness”

Knowing that PEF investors are looking for future return on investment and growth potential, remember to emphasize this rather than dwelling on past performance. Growth opportunities, reputation and industry leadership are some of the many qualities investors appreciate. Documenting improvements that can be made with new capital helps you to position the company better and can increase value substantially. Provide them with a package that includes clean historical financials, 3-5 year pro-forma projections, and solid research to substantiate growth potential.

The article points out that “frequently, even if equity-worthiness is good, entrepreneurs are their own worst advocates.” A business owner “should assess whether he/she is ready to completely disclose information about financial and operating performance, and to make decisions in tandem with a PEF. Finally, an entrepreneur should learn how best to communicate his/her motivation to close a private equity deal.” It can be extremely beneficial for owners to work with a business intermediary who can assist you with presenting your business to PEF investors.

Before going down this path, we suggest that all owners:

  • Develop an exit plan or Business Ownership Transition Plan that allows you to determine which transition options are right for you.
  • Understand your prospective buyers and what they are looking for.
  • Determine what is attractive about your business in light of PEF buyers’ unique considerations.
  • Position your company to be a “beauty” in the eyes of the buyer.

There are thousands of very quiet private investment groups and offshore investors that are interested in acquiring profitable U.S.-based, privately held companies. The world is now your marketplace, and your buyer may be anywhere in the U.S. or around the world!



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