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Private Equity = Opportunities
I wanted to follow up on my recent insight Private Equity = Disaster. My nephew is a very successful Mergers and Acquisitions investment banker for a prominent firm, so I asked him recently to describe the experience of “selling” a small business to a Private Equity firm. His response was insightful. Below are a few of the observations he outlined that I should keep in mind as I consider the “opportunities” that come along with Private Equity transactions.
Prior to executing the sale contract and the transaction closing, be prepared for the PE firm’s accountants and analysts to be all over your firm to do one thing: beef-up your firm’s EBITA (Earnings Before Interest, Taxes and Amortization). This is achieved by simultaneously increasing revenue and cutting expenses. To increase revenue, PE firms will often invest in business development efforts. On the other side of this investment, will be a mandate to cut expenses, sometimes dramatically. These cuts will often lead to:
- The loss of key employees that your new owner decides are over-compensated. These are often people you have worked side-by-side with for many years. Possibly the children or relatives of former, now retired employees. And they are likely a big reason for your company’s success up until its acquisition. Changes to the makeup of your team are not recommendations, they are a requirement.
- Be prepared for fewer options and lower benefits in medical insurance that you have taken advantage of for yourself and your family, and have provided to your employees.
- As a business owner, if you have enjoyed a flexible schedule and considerable time away from the business to pursue outside interests, be prepared to change your work practices; or be fired.
- If you do stay on to “run” the business, you will be confronted with a new “forced-down” culture. And you will be expected to embrace and promote that culture, or be fired.
- If you have children that have shown an interest in the business, or are already working in the business, their future with the company is of no concern to the acquirer of your business.
These are certainly not all of the opportunities that typically become reality when selling your business through a Private Equity transaction, but keep these in mind as you are considering your options.