Selling Your Business [M&A Series: Part Two]: Private Equity Firms Three Options to Consider

In part two of our M&A Series on Selling Your Business, we will be discussing private equity firms and the types of deals they offer to companies interested in selling.  (Note: You can go directly to the private equity firms although, most of their deals come through investment bankers.)

Selling your business (or a piece of it) isn’t always about saying goodbye to the company you’ve worked so hard to build. Private equity firms typically offer business owners several options when considering the sale of their business or parts of it. Here are three types of deals offered by private equity firms.

1. Significant Majority Deal

A significant majority deal is best for business owners who want to trade control for cash. In this type of deal, a private equity firm will buy between 75 and 100% of the company, and the seller has a choice of staying involved in the business. By staying on, the seller can continue in a meaningful role, with a reduced commitment, while converting much of the risk into cash by selling a majority interest to the private equity group.

Private equity firms tend to seek out this kind of deal, since it will allow them the flexibility to make strategic changes that could positively impact the worth of the company. This becomes more important if the firm is looking to buy the business, make those changes and then sell it again – a strategy core to the success of most private equity firms.

Is this option right for you? A significant majority deal could work for you, if you’re ready to give up control of the business you built. In this type of deal, you could still be involved from a strategic perspective, but you’ve taken your risk off the table. If eliminating risk in your business is a main goal when getting involved with a private equity firm, or you’re looking to cash out, this could work for you.

2. Small Majority Deal

A small majority deal is best for business owners who still have a vested interest in the company. For instance, a business owner may still want to have a say in the company’s culture, or have a hand in running it. In this type of deal, a private equity firm will buy between 50 and 74% of the company, giving the seller some capital and likely letting them maintain most of the operating control.

This can be an attractive deal for business owners because the investment is more like a partnership with the private equity firm. The firm will bring the necessary experience it takes to grow a company and possibly growth capital, while the business owner continues to run it. Sellers often choose this option in order to expand rapidly, build their sales team or set up distribution networks.

The success of small majority deals is evident in a recent transaction led by Chris Lewis, Managing Director of Riordan, Lewis & Haden in Los Angeles, CA. His firm came across a very profitable company that was generating  $80 million, and was looking to sell. Six of the existing executives owned the company as a group, and while they were exploring their options, other private equity firms pushed for a significant majority deal of 90% or more.

But the owners weren’t biting. They still wanted a significant hand in the business. So Chris’s firm offered them a small majority deal at 60%, and along with their offer came strategic help on how to make the company and their services more valuable in their industry.

The result? All six owners stayed with the business, which has grown organically 6x since the time that Riordan, Lewis & Haden got involved. Not to mention that the value of the company is about 10x more than when the firm originally invested. All parties, on both sides of the deal, were satisfied.

“In deciding whether to sell your company; don’t let your transaction manage your life,” Chris Lewis offers as advice to business owners considering selling their company. “Let your life manage your transaction.”

Is this option right for you? Private equity investors typically use a mix of debt and equity to buy a large stake in companies. Because of this, it’s very important to consider who’s at the other end of the table when getting involved with a private equity firm. If you’re looking for a partner who can help you grow your company, and you’ve found a private equity firm you like and trust, this option could work for you.

3. Minority Deal

A minority deal is best for business owners who believe they have more to offer when it comes to running the company than the private equity firm, and still want to be heavily involved with day-to-day business operations. In this type of deal, a private equity firm will buy less than 50% of the company, which allows the business owner to continue running and controlling the operations.

This type of deal typically sets up a business owner to sell some interest in the company to fuel growth and possibly generate some liquidity, but also to sell the rest of the company later on at a higher valuation. With the capital raised from a private equity investment, your business could enjoy new technologies, acquisitions and a strong balance sheet.

Riordan, Lewis & Haden recently had success in offering a small minority deal to a profitable, 10-year-old company that was growing fast. The owner had been given advice that since his company was doing so well, it might be time to consider selling, although he wasn’t sure he was ready to leave his company for good.

Even though the owner had both significant majority and small majority deals on the table, he opted for Riordan, Lewis & Haden’s minority deal, giving the firm less than 50% of the company while he maintained control. Since then, the company is doing great and has grown organically 5x in size since the investment from the private equity firm.

Is this option right for you? “Starting with the end in mind is key,” said Justin Redfearn McLain, managing member of Duart Mull, the investment management arm of a family trust in Atlanta. When considering this option, decide on the amount of involvement in your company you’re looking for from a private equity firm. If your business is in need of a jump-start and you’re looking for help, whether you’re just starting out or you’ve hit a rough patch in your business, a minority deal could work for you.

In part three of this series, we’ll explore the way strategic buyers, like Cisco and Google, approach acquiring a company. Stay tuned!

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