As the former head of European investment banking at Baird, David Silver has over two decades’ experience helping entrepreneurs sell their businesses. Here he discusses the most common concern when selling to private equity – losing control – and why you’re more in command than you might think.
When I talk to entrepreneurs about the possibility of selling their business there’s an unspoken question on everyone’s lips. Will I be ceding control when a private equity (PE) investor comes on board?
Imagine selling your own business. You’ve worked late nights, missed out on family time and led your business to where it is today. Whether you’re selling 50% or 90%, you’ll move from owning your business outright to sharing a degree of control.
As a result, inviting a private equity firm into your business feels like a leap of faith. However, as the business owner, you have a lot more control than you think.
Selling to private equity isn’t all or nothing
There are a number of reasons for selling a stake in your firm. From an event like ill health or a death in the family, that makes you reassess your priorities. To a desire to step away from the business or raise money from the sale. Each of these situations represent a different jumping off point and they could all impact the amount of the business you sell.
Let’s say you take the decision to sell your entire business for £100m. As the sole owner all that money ends up in your pocket. Which sounds like a very nice position to be in.
But, sell 50% to a PE firm and grow the business so it’s worth £300m when you sell it again and your remaining stake is worth significantly more. With a bigger sum in the bank, you could de-risk the future for your family for who knows how many generations. And you can also continue to have an ongoing role or involvement in the business.
Selling to a trade buyer isn’t always a good option
One alternative to PE investment that often comes up is the potential to sell to a trade buyer. Here’s how the argument goes:
- Selling to a trade buyer means there are natural synergies that will help both businesses and which have value to the buyer.
- A PE firm needs to make a bigger return on their purchase than a trade buyer, so they’ll want to drive their buying price down to make it easier to achieve high returns.
- Therefore, a trade buyer will be more willing to pay a higher price than a PE firm for the business.
In my experience, this argument doesn’t stack up. And that’s due to misconceptions about the amount PE firms are willing to pay.
Evidence shows that PE investors will often pay more than a trade buyer because they intend to drive bigger returns than a strategic buyer. Bring in a PE investor and you’ll:
- Acquire significant expertise to help drive growth
- Be able to leverage additional support networks
- Potentially gain access to additional capital
Unlike a trade buyer, who already has a business to run, PE firms are dedicated to buying, growing and selling firms – not operating them. All of these factors give PE investors the headroom to stretch to a bigger number.
Another often-overlooked aspect is that, in comparison to trade buyers, there’s an enormous amount of PE capital out there ready and waiting to buy your business. And, as I discuss in the next section, this gives you more choice over who you work with.
Working with a PE firm gives you more control than you might think
There are a wide range of PE firms to choose from in the market. And, if you’ve got a good business, you’ll be in a strong position to select a PE firm that meets your needs. There are a range of factors that could influence your decision but these are some of the more common ones:
- How much investment you’re looking for in the business.
- The amount of support you want to help you drive growth.
- Cultural fit – they need to understand you, your business, your team and your ways of working.
- The amount of money you’ll be able to take off the table.
- Whether the firm has the expertise you want, like taking UK businesses into America.
To make the right choice, you need to be clear about what you want so you can narrow down the right firm to deal with. And that means looking beyond the money as the best PE firms provide more than a simple financial exchange.
Many entrepreneurs tell me they prefer their money to be tied up in their business. Because, in comparison to investing in stock markets that they have zero control over, they’re more in command of their future. However, this is a risky strategy because it also means all your money is in one place.
By selling part of your business to a PE firm, you will de-risk your investment. This makes good business sense. You wouldn’t allow your business to have too much customer concentration. The same is true from an investment perspective.
An extended team of experts
I often hear entrepreneurs say: “I’ve never had anyone around the boardroom table who doesn’t report to me.”
My response to that is, if you’ve ever sought guidance or support during your business growth journey, you’re no stranger to working with others. Think about all the different people who provide advice and guidance to your business. You’ll realise that gaining insight from a PE firm is no different.
However, that does make choosing the right PE firm an important part of your decision making. Because trust is a huge part of the whole PE process, you’ll need to ask yourself who you feel comfortable working alongside.
Bigger investment firms can feel like you’re dealing with an institution rather than an individual. Whereas smaller PE firms bring more personal relationships. By partnering with kindred spirits, who will support you as well as push you on, your PE partner should be like a personal trainer for your business. Choose your PE partner well and you’ll work with like minded people and retain more control.
Control through contractual agreements
Legal agreements are another way to help you retain control. During the sale process, your lawyers will help you think carefully about the protections you need. And they can be locked in to the investment agreements.
This might include terms like taking the possibility of selling the business off the table in the next five years. Or you might decide there are certain actions that can’t be taken without both parties agreeing to them. Like hiring an individual with a salary over a certain amount. By agreeing a defined list of important situations, you’ll ensure they only happen when both you and the investor are in agreement.
Just as no two businesses are the same, no two PE investors are the same. To find the PE partnership that lets you retain the right amount of control for your circumstances, you need to remain open minded. By looking for a PE investor that really understands what makes you tick, you’ll enter into a partnership with people you can trust.
In my experience, trust trumps control. And it also helps you make the most of your business, boosting your remaining stake and generating even bigger returns on all your hard work.