Selling your firm to a private equity
investor can be an attractive exit option — as long as you understand the
investor’s game. Some private equity companies try to buy small businesses like
yours for a fair (read: low) multiple and inject some value in terms of cash,
contacts and management expertise, thereby increasing the value of your company
(and their holdings). They may also try to roll you up with a few other complementary
businesses and build a combined company large enough to attract institutional
money and the higher multiples that come with bigger businesses.
If you answer yes to the following three
questions, seeking a private equity investment could make sense for you:
- Do you want to take a few chips off the table (buy a cottage or
ski chalet) and still own a good-sized chunk of your business for the
- Do you need a cash injection to fuel your growth?
- Do you need a savvy business partner to challenge you as you
think through the big strategic decisions?
If you answer yes to all of the
questions above, a deal with a private equity firm may make sense. A private
equity firm will probably offer you a low valuation for around 50 percent of
your business and expect you to stick around for three to five years to get the
rest of your equity out. You may choose to sell a chunk of your equity because
you believe your remaining shares will be worth more after the private equity
guys inject their smarts and connections into your business.
So when you’re looking at an offer from a
private equity firm, spend as much time evaluating its connections and business
savvy as you do on the valuation formula used in its offer. Talk to other
entrepreneurs the firm has invested in and ask about the contributions it made
beyond just cash.
If you need cash for growth, want to take
some chips off the table and crave a sophisticated and savvy partner to
challenge your thinking, keep the private equity option open as you consider
your exit alternatives.