It may be time to consider private equity as an exit option

What do you think of when you hear someone talking about selling to or recapitalizing their business through a private equity group (PEG)? Do you think of:

  • Names like Blackstone, KKR, The Carlyle Group, and Bain, some of the largest PE firms in the country;
  • Big-city “suits” invading, taking over, and looting your business; or
  • Your company being flipped in several years later, a shell of its former self?

It’s no wonder private equity is often dismissed out of hand as a transition option.

Let’s take a moment to summarize how private equity funds generally work. Private equity firms create their funds with a pre-determined life, after which the fund needs to be liquidated and the capital returned to its investors. The fund exists, from inception to liquidation, for a period of 10 to 15 years. During that time, the fund managers raise capital from investors, which can take one to two years. Once raised, PEGs invest the capital by buying all or a substantial portion of other companies. The goal is to then build performance and the value of the company so that later, when the PEG exits that business, they make their return on investment. The holding time for the investment in the company averages three to seven years.

On the surface, the vision of sharks in suits may be warranted. But from my experience working with middle-market companies, it’s not. There are many, many good PEGs creating win-win opportunities for investors, owners, and their companies. For example:

  • Many PEGs only invest if there’s a strong management team in place. PEG principals spend 30% or less of their day-to-day time working on the issues of their portfolio companies. They don’t want to run the company. They want to help the management team drive growth, performance, and improved results.
  • PEGs don’t always buy 100% of the company. This allows current owners to keep a portion of ownership and get a “second bite at the apple.” If the business is successful and generates more profits, dividends, and increased value, the current owner gets some of it, too.
  • Most — but not all — PEGs do want majority control and expect a minimum of 51% ownership. This still leaves a fair amount of room for the current owners to decide how much ownership they want to keep given their goals.
  • An increasing number of PEGs are pursuing minority investments. This allows owners that need capital to grow but not give up control.
  • PEGs could finance a transition to key managers or family members. These future owners often lack their own capital or access to enough traditional financing. Partnering with the right PEG may provide the capital and support to help the next generation grow the business (and their access to resources) so they can later afford to buy the company back from the PEG.
  • PEGs serving middle-market companies are not the same scary personalities as the PEG giants depicted in the movies. They are good, intelligent business professionals that want a win-win. They are men and women seeking to help businesses grow and thrive, contributing to the economy and our communities. They are good people to get to know and possibly work with.

I routinely meet with business owners who believe their transition options are limited. Often, private equity hasn’t been considered or, if it has, it’s been dismissed as too threatening.

If you’re a business owner, you should explore all your options. Private equity isn’t for everyone but it may be an option for you. You won’t know if you don’t check it out. Learn more, meet with some principals, and explore the fit. You may be pleasantly surprised.

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