It’s a difficult question. There are so many significant misconceptions about private equity.

Ask three associates in our firm this question and you may get three different answers, each of them defensible. The most common misconception is that a private equity buys a company only to take a fiscal chain saw to it, cutting off live limbs to optimize cash flow.

This image is not representative of the vast majority of private equities. In fact in a number of deals we’ve facilitated or analyzed, profits have temporarily declined after private equity acquisition because of intensive investments designed to scale the acquired business. These growth oriented investments are often manifested in sales & marketing, production upgrades, geographical expansion, product & service diversification, research & development, strategic acquisitions…

The vast majority of private equities are interested in growing the business they buy, not in disassembling or gutting them for a short term profit.

It’s a good question for which there is no single answer. Private equities have very different approaches to the employees of their acquisitions. In the generalist of terms it can be said that most private equities are interested in leveraging an existing top management team and other talented, productive employees. Many of our clients see themselves as “smart money” but not a day to day management team.

In these cases the sellers’ effective employees not only survive an acquisition, but are well treated and highly incentivized to make the company’s transition and growth trajectory happen.

Of course a strategic acquisition usually presents a more complex set of questions and considerations when it comes to existing teams.

Needless to say preparation for engaging private equities is by definition very individualistic. That said, we advise company owners to prepare in two distinct prefatory phases. We call Phase One, understanding your motivation for a transaction. By that we mean to come to very specific terms with what you’re trying to accomplish . This is usually best accomplished with some serious questions and some unvarnished replies. Why are you selling or seeking capital? Have you contemplated whether it’s really time? How will you feel about selling what might feel very much to you like a child? How will you feel about diluting your equity or even more profoundly losing control? What are your biggest fears, your greatest apprehensions? Do you want to stay involved? How will you feel when decisions that you deem as disastrous are made and you have no say in the matter and no one even consults you? How much will you care about your business’ future and direction when you’re gone or in a dramatically different role? I think you get the picture. The idea is to marry the very personal, even intimate meaning of what a sale or capital event will mean to you. We often have owners tell us, “I won’t know how I’ll feel about these things until they happen.” Of course that makes sense and it’s often true. In our experience it’s critical for owners to wrestle with these issues early on in the process and to keep working through them. If you begin embracing these questions and the realities they represent late in the selling process it leads to realizations and revelations that are extremely difficult to positively manage at the advanced stages of a deal.

Phase Two is about packaging and positioning. Of course that involves a lot of preparation in a lot of areas. The most obvious component of this difficult exercise is financials. Structuring financials so they can be devoured and digested by a private equity can be a task. What many sellers fail to do is to put together a cohesive narrative, a story that is grounded in reality and one that will interest the right investor. Private equities do not buy businesses solely based on financials and cash flows.

For Exit Strategies, the challenge is to help sellers construct a vision of opportunity that’s clear enough for us to marry that vision to the most compatible and promising private equity.

Yes. We recommend that business owners retain counsel. We recommend hiring counsel with a mergers and acquisition focus. Once conversations start to get serious, it’s important for a seller to have counsel.

A buy side origination firm can help you navigate the private equity space and other investment sectors. A good buy side firm can help you organize and solidify your thinking about a sale or capital event. Once this is accomplished they can do some packaging, positioning and hopefully create an introduction with a firm that fits your company and objectives well.

At Exit Strategies we call this a tilt analysis. If you can introduce two parties who have a favorable predisposition, who are naturally tilting toward each other, you create a real bias for success. This can save you a lot of time, effort and money. Unlike many buy side firms we take an active role in facilitating the deal when it makes sense to do so.

Needless to say, a buy side firm can’t make your company into something it isn’t nor make a private equity radically depart from its investment profile or strategy. Private equity isn’t for everyone nor is a buy side origination firm.

In our experience many of the biggest mistakes a seller makes are made before a private equity is even introduced. Sellers often enter the private equity market with a significant weakness or risk that’s not resolved or not yet trending positively. These risks could involve any number of conditions i.e. customer concentration, major unresolved litigation, a hole in top management with perceivable impact on company performance, failure to keep technology competitive, stagnant product development… These types of weaknesses are rarely missed by a private equity. They have significant impacts on a private equities interest or valuation.

Another major mistake sellers make is entering the private equity market with a lack of clarity or resolution on key issues i.e. lack of a firm decision to sell or dilute their position, unresolved conflict with partners, a rational vision of valuation, their vision for the company’s future… Indecision often manifests negatively in the private equity engagement and negotiation process.

Private equity groups do both majority buyouts, minority investments, and full acquisitions. To compare the two buyers we would like to compare a majority PE deal vs a strategic buyout. A private equity buyer is typically looking to buy a large percentage of the company if not a hundred percent of it. The intent is usually to partner with you and your management team to energize the scaling process. The typical goal is to allow you to take a significant amount of chips off the table but continuing to grow the business and ultimately get a second bite of the apple.

In strategic deals, buyers are usually in your industry or on its periphery. The common objective is to grow by acquisition. The strategic buyer knows exactly what they’re looking for. They may have decided they want you even before they come calling. In a lot of these cases it comes down to price.

Clearly the private equity and strategic buyer are not the only type of investors you may encounter, but they are the majority of investors we do business with. You may be a fit for only one type of buyer, or you may be open to both options depending on the individual characteristics.

Of course we can’t tell you exactly what you should focus on and just how much you should focus on it. If there’s anything we’ve come to appreciate is that no two sellers and no two buyers are exactly the same.

Here are some of the biggest concerns we hear most often from business owners looking to sell or in search of a capital event. The most common concern we encounter is probably the most obvious, which is a fear of undervaluing their business and leaving money on the table. The majority of owners care about the future of the business they built. A minority of owners wouldn’t mind if the business burned down after the check cleared.

The stakeholders in your company often have objectives that are different from yours. It’s good for you to have a clear understanding of how all the stakeholders in your company fit into or fail to fit into the transaction you’re contemplating. Some of these stakeholders are your top management team. The questions of their ongoing participation may or may not be important to you, but this issue will almost always be important to your investor.

Many of the sellers we work with are often focus on transaction costs. One seller concern we almost always encounter is the fear that the seller will go through the expense, time and an emotional roller coaster only to wind up at a dead end. The value we offer to the seller is to dramatically reduce that probability through our in-depth knowledge of what players in the private equity opportunity best fit the investment opportunity.

Before they engage too deeply, most private equities focus on how a firm fits their investment profile and strategy. They are focused on the risk of the investment and analyzing where the business is exposed. What is the worst case scenario? Is the product at risk for being obsolete? Is the industry headed towards a down turn? They are focused on the down side as much as the upside. They also look at how the company could fit with its current portfolio. The portfolios of private equities have strong logical connections that underpin them. The algorithm may not jump out at you, but it’s almost always there.

Initially a private equity will assess how your business generally conforms to their over arching strategy, direction and existing portfolio. If at this point they like what they see, they then dive very deeply into the business. Private equities are smart money. They won’t get carried away with your highly subjective even romantic vision of what your business is. They deeply assess issues like; industry, positioning in the industry, history, growth trajectory, every component of the business’s risk profile, proprietary technology, method, process or other intellectual property holdings, competitive forces, management team, financials, the assets they possess to help leverage the business, a valuation for the business… The list is of course much longer. Owners need to prepare for a lot of questions many of which will by definition be sensitive in nature and conducive in some cases to giving offense.

If we had the right answer here we would be very active in the stock market! Some mistakenly feel the answer of when to sell comes down to market and financial timing. This assumption takes far too narrow a view of what a business represents to an owner. Even if the peak value of a company could be determined, it would still be only a part of the decision to sell. In many cases it wouldn’t even be the major factor in deciding to sell or not to sell. Some of these factors not predicated on financial or market positioning could include:

• Is the owner in the right psychological position?
• Are partners and or family members on board?
• Does the buyer provide the right type of future for the company?
• Are the total proceeds enough?

Interestingly, we get a sense of how a seller is positioned on these issues not just by what they say but how they say it.

Professional buy side enterprises view confidentiality as central to their process and the value they provide. Once we get beyond initial fact finding we’re happy to execute a non disclosure agreement and set up a contact protocol that further protects your privacy.

Needless to say, if you’re being approached by a strategic buyer (a company in your space), confidentiality becomes even more complicated. In addition to the basic confidentiality protections, it’s good to have an early conversation about what will be revealed and how.