Exit Strategies for Entrepreneurs

Private company owners have three general exit strategies: management buy-outs, family transitions and selling to a third-party. The latter is typically made up strategic sales and financial sales. A strategic sale involves selling your business to a natural buyer such as a vendor, a customer or a competitor. Strategic buyers can add significant value to the business using their existing knowledge of your industry and operations. Financial buyers, on the other hand, generally intend to exit within 5-10 years of the acquisition. Financial buyers are the topic of this blog.

How Do Private Equity Buyers Evaluate Your Business

Each fund, or general partner, will have different criteria for target companies. There are, however, some consistent measures they're interested in.

Debt Capacity

If you're selling your business to a private equity fund, you'll want to clean up your balance sheet in advance. Pay down debt, clear shareholder accounts and ensure your assets are free and clear of encumbrances such as liens and mortgages.

Asset Sales

Private equity buyers will seek to sell off redundant assets and divest of non-core divisions or product/service lines. You may want to sell these assets yourself in advance of seeking a suitor.

Margin Enhancement

Financial buyers will evaluate whether or not there is a potential to improve margins. Examples of how they may do so include renegotiating supply agreements, seeking workforce efficiencies and making follow-on investments to modernize equipment, fleet and facilities. Beating them to the punch may allow you to obtain a better exit value.

Industry roll-ups

Another tool that is commonly employed by private equity firms is to make a series of acquisitions to reduce rivalry and price competition in a specific territory. If you have the stamina and financial resources, you could implement similar strategies in preparation for sale.

Finding The Right Private Equity Buyer

Often times private equity firms will have sector-specific strengths and know-how. Those firms will have an ability to pay more for your business. Do not kick-off a process with a firm until you're confident that you can create competition in the deal process between qualified buyers.

Some private equity firms will also want you to stay on as management and may be prepared to offer you an equity stake to keep you aligned with subsequent business strategy changes and portfolio moves. In these situations, sellers can gain additional upside by partnering with the private equity firm.

If you have specific concerns such as the diplomatic treatment of your workforce, jobs in your community or the vitality of your current vendors, you may want to seek out a firm that has a track record of working well with stakeholders.

Ultimately, selling your business to a private equity may be a great move, or could be a poor fit. Determining your exit strategy before initiating a process is a wise approach to succession management.