Succession Planning

Should You Sell to a Private Equity Firm?

Planning for the future of your business? Consider what you most want to gain from the transaction—depending on the needs of your company and your own time frame, a sale to a private equity firm might be attractive. Here's what you should know about this type of sale.


When business owners decide it’s time to start looking at the company’s future beyond their own influence, many options can come into play—and each has its own strengths and weaknesses. To see the whole list, read our infographic.

For those considering selling to a private equity firm or financial sponsor, here are some considerations to help you determine if it could be the right path for you and your business.

What Does an Outright Sale Achieve?

In a leveraged buyout, a business is acquired by a financial sponsor, such as a private equity firm, whose objective is to exit the investment in a relatively short period (usually within three to five years), having often realized a high rate of initial internal return. In this type of buyout, financing typically comes from a variety of highly structured debt instruments, with equity typically accounting for only 30 to 50 percent of the funding.

Is It Right for You?

  • Thought Partnership: Financial sponsors often bring substantial industry expertise to the table, and they may be able to move quickly through the deal process. An understated but important benefit is that sponsors typically maintain confidentiality, so your sensitive data remains protected from discovery by a competitor. Furthermore, depending on their bench strength and experience with public capital markets, they may be able to offer flexibility on the deal structure.
  • Appetite for Risk: In this case, the ability to pay is highly dependent on the availability—and cost—of debt financing. So because in a leveraged buyout, the debt-to-equity balance is typically skewed toward the debt end, market volatility may increase the rate of a default. This also means that while the deal is in play, there can be short-term risk for shareholders. Furthermore, because the fixed costs—in this case, the interest—are increased, there’s a higher chance of volatility in cash flow.
  • Disruption: While there are no absolutes, selling to a financial sponsor can potentially be disruptive to day-to-day operations, and it may be hard for you to protect and retain your employees once the new firm assumes its equity interest in the company.
  • Equity Rollover: Private equity firms may expect that some, if not all, of the owners of the acquired company will accept equity in the new company as partial consideration for the sale proceeds. If so, those owners may be required to “rollover” a percentage of their equity into the new company.
  • Payout: Since the private equity firm may sell the business within three to five years of purchase, that second sale could give the original owners a second bite at the apple—but keep in mind that it could also potentially be the reverse.
  • Time Commitment: Sellers may need to stay on during the time the private equity firm is involved—thus, this option might not provide the opportunity for a swift exit for the original owners. Also, during normal business operation, don’t forget that the private equity firm will likely be on the board, working to protect its investment.

If you're willing to assume short-term risk and possible disruption to day-to-day operations, then selling your company to a private equity firm or other financial sponsor may be the right choice for you. Financial sponsorship endorsement can provide much-needed expertise, capital and external credibility, which, in turn, can provide the opportunity to continue your company’s long-term strategic vision and business plan.

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