[This is a guest article written by Virginia M. Turezyn. She is a managing partner at Sival Advisors LLC, a boutique M&A advisory firm for technology and service businesses in the middle market.]
Most aspects of life are about relationships. The relationship you have with your family, friends, employees, business associates and customers all revolve around trust and respect if they are successful ones. When you run a Company, there are a lot of people who depend on your judgment to make the right decisions, including selling the business.
There is a level of trust among your employees and customers that you will transfer the business to a new owner who will continue to further the mission and values you have established. If you have built your business the right way, one loyal customer at a time, you have most likely provided them with solutions vs merely selling them a product or service with no support, framework or ongoing enhancements. Your customers are counting on you for a core part of their business and they expect you to return their years of loyalty with care and respect in choosing the “right” new owner. Your employees will also be “on edge” wondering about their futures. There is a lot riding on your ultimate decision.
Private Equity Fund (PE) vs Strategic Acquirer vs Family Office
Outlined below will be some of the key attributes of each type of buyer for your consideration. There is no right or wrong choice and each has positives and negatives to be aware of.
Private Equity (PE)
Private Equity firms seek to secure control or majority/minority ownership in attractive businesses which they can either use as a base to expand from (a platform investment) or as a tuck-in for a deal they have previously acquired for which your Company is in the same line of business or a related field which would strengthen the overall business proposition.
PE firms offer many positive elements:
- Additional capital to help the business grow
- Improved infrastructure
- Broader sales and marketing capabilities
- An expanded network of relationships
- Deeper focus on analytics and key metrics
- Retention and more expansive career paths for key employees
- Financial incentives (earn-out for owners and equity for employees)
- Upside potential in a future sale
All PE firms are different. Some have deep industry expertise, some are looking for exciting new opportunities in “cottage” industries which are ripe for consolidation, some focus on retention of team, while others have deep benches with talent they want to bring in.
PE deals typically include earn-outs, escrows, retention packages for a set duration, and non-compete provisions.
A strategic buyer is generally a larger corporate entity in your line of business or one who covets your area of expertise and views you as a critical tactical purchase. They will generally know more about you upfront (can be a competitor or customer) and depending on how important to their strategic plan they view you, can place a higher value on your business. If you are just be introduced to them for the first time by your Advisor, it is important for them to find the right sponsor within an organization who would be responsible for leading the charge with their Business Development liaison. In today’s world, international entities should be considered.
This type of acquisition is generally a full buyout and will include a possible earn-out and retention period (1-2-3 years). As an owner, you will be subsumed into a larger entity wherein a more hierarchical and bureaucratic structure awaits.
A family office is more akin to a PE firm. While a PE firm typically holds investments for 3-7 years before selling the business again, most family offices have much longer horizons and are looking for growing cash flow which they are happy to retain. They are generally less “hands-on” in terms of management and if the business is run well and growing will be less “intense” in their interactions than PE owners.
While many positive attributes exist within each possible entity the negatives are more a function of your desires going forward. You need to be honest with yourself as to whether you want a meaningful role in the future, for how long and whether you can live within certain new boundary lines which will be drawn for you. Think these points through carefully upfront to ensure a smooth process and fewer surprises later.
A sophisticated Advisory firm will guide you based on your specific criteria and negotiate on your behalf to secure the most favorable terms. It is in your best interest to showcase your business across a broad spectrum of firms to find the right fit and relationship you feel comfortable with as the optimal owner for yourself, your employees and your valued customers. Compare and contrast the attributes of the different parties with your trusted Advisor to achieve a successful outcome.
Virginia M. Turezyn is a Managing Partner at Sival Advisors LLC, a boutique M&A advisory firm for technology and service businesses in the middle market. Virginia has a broad and diverse background in strategy and business development, corporate M&A, private equity, venture capital and finance.