If you own a privately held business, it is likely you have received a call from a private equity firm telling you they have specifically targeted you and want to buy your business. You have heard now is a good or even great time to sell. The price they offer seems reasonable or even good. They tell you they pay cash and can finalize the transaction quietly. “It will be quick, easy and fast. No need to shop the deal or talk to your lawyer, of course. We do this all the time.” What should you do?
Over the course of three articles, we will offer tips on how to navigate these situations. In part 1, we explained what you can do after the offer is received. In part 2, we’ll explain how to educate yourself about the business market.
Understand the market of buying and selling businesses
Your private equity buyer has done their homework and now you will need to become as smart as they are on the market conditions for businesses like yours. Investigate other similarly sized businesses in your geographic market that have recently sold. Private equity firms often value a business based on a multiple of its past or projected earnings. Understand what are likely multiples of EBITDA (earnings before interest, taxes and depreciation, a common cash flow measure) or revenue being paid for businesses of your size in your industry. Often more valuable companies or those with greater growth prospects sell for greater multiples.
Understand that businesses that sell a product with a low marginal cost, such as software, may sell for much higher multiples than businesses that offer services. Consider multiples over a period of time. Are they generally increasing or decreasing? What are the reasons behind such changes? Interest rates impact businesses differently. Some businesses need large amounts of capital to be reinvested to continue growing their revenue and profitability. Consider whether there are other trends in your industry which deviate from theses broader trends.
A savvy investment banker may have expertise in certain industries and know many of the acquirers directly. These bankers often have a treasure trove of data (including proprietary, non-public data) related to transactions that have and have not closed. Often in interviewing an investment bank they will share some of that data with you for free to demonstrate their success and knowledge. This is key to any negotiation. You should assume your private equity buyer has an initial advantage in that respect.
Market position messaging
How is your company positioned? Your customer base may be perfectly diversified, but perhaps you are overly reliant on a supplier. You should also put yourself in your buyer’s position and examine the marketplace for sale of companies. How does your company compete against similar businesses? Often these buyers target an industry and contact many businesses to close an acquisition. You may be competing in this marketplace already. Make a case for why your buyer should not make an offer to one of your competitors. Also be aware of what disadvantages you might have in this respect — items that decrease value and need to be remedied — and fix them before the process begins.
Concentrate on areas of maximum value
Remember that private equity firms see and review many deals, not just those they try to create themselves. It is easy for them to characterize your business like another one they acquired but stress that yours is less profitable, smaller or not as geographically diverse. This is intellectually lazy. This simplification or bias can make it easier to explain to their lenders and partners why they would pay a maximum price for your company. Therefore, your business may be more valuable to them when it looks like others they have acquired with fewer “new” or “different” features.
Any good private equity firm knows what drives value. For you, this may mean growth in revenue or profitability. It could mean the diversification of customers or an exceptional management team. There may be a specific customer, unique patented or protected technology or certain strategic relationships. To drive exceptional value, identify those areas, highlight those items in discussions and be prepared to do it again and again.
For more tips about selling your business to a private equity firm, read more at thompsoncoburn.com/STLINNO.
Thompson Coburn LLP is a full-service business law firm with more than 400 attorneys nationwide. For more than 90 years, we have provided the legal services and counsel our clients need to realize their most critical goals.
