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The company you founded is turning a healthy profit and has become a market leader, so you’ve decided to sell it and are expecting a respectable return. You could wait and keep growing it so it fetches a better price, but you need capital and a management team with the vision and resources to make it happen. Selling to a private equity firm while remaining involved during the growth phase could be the strategy you need — if you’re willing to lose everything to try to hit that mark.
Losing everything is always a possibility in business, but equity sales take the stakes even higher. These investors typically look for a return as much as seven times EBITDA (earnings before interest, taxes, depreciation and amortization) at the time of acquisition, in as little as three to seven years. If the bet pays off, everyone is happy. If it doesn’t, they can lose everything. What’s worse, you probably won’t have a say in how the new owners play their hand.
Private equity firms have become more discerning and particular about acquisitions, but there are always opportunities if your company is successful, has room to grow and shows it can realize its potential. They tend to look for companies in industries with a proven recurring revenue model. That’s what the equity firm Blackstone saw when it moved to acquire a majority share of Spanx from founder Sara Blakely in 2021.
After transforming the shapewear industry in the early 2000s, Spanx found its success stagnating during the pandemic and in the face of an expanding field of competitors. Blakely also wanted to develop more products and channel expansions but needed partners to help her. The deal she struck with Blackstone valued the company at $1.2 billion and put her personal worth back in the billions. Blakely remains a “significant” shareholder in the company.
Related: Every Business Owner Needs an Exit Plan — It’s Time You Develop Yours.
Making the perfect equity match
Spanx may have lost some of its sheen before the deal, but its foundation must have been strong, or Blackstone wouldn’t have done more than glance at it. Most private equity groups look first for profitability, usually with at least $1 million in EBITDA earnings. But they also want a well-structured leadership team. After all, a private equity group is really just a group of investors with a lot of money and other financial resources. They don’t have staff who come in and help execute the business. So, they need people in the industry to continue to run it even if the owner steps out or steps aside. They can open some doors, but it’s up to the original team to walk through them and make the plan work.
You should also ensure that everyone has the same expectations for why they’re bringing on investors, the results they want to achieve and how they’ll achieve them. Lack of clarity can lead to unhappy endings.
One regional consulting company I worked with had grown significantly, and the owner wanted to go national but felt he had taken it as far as he could. He brought in a really well-known private equity firm that bought a major portion of the company. He and his partner planned for one to retire and the other to stay on and manage the firm. But they weren’t clear on what the metrics were for success at the next level of the exit, and worse, they didn’t align with the equity firm’s strategy. The company went out of business in only a few years. Both partners lost their equity and some money that was owed to them from the deal.
The lesson here: You’ve got to be clear across the board. Take these steps to get the clarity you need:
Understand what equity investment can and can’t do
Many business owners have the misconception that it’s the best thing in all situations — that it’s going to pay and grow them the most. It may not actually work in your specific case.
Be clear on your strategy for selling to the equity firm
Do you want to get out completely and sell 100% to the investors, or stay on to get “a second bite of the apple” in higher returns after the equity group grows your company?
Interview other entrepreneurs who have worked with this private equity firm
Most private equity groups have a full list of all the companies they’ve invested in and bought. You’re getting into a partnership with these people, so you want to vet them like you would when bringing on any other partner in your business.
- Talk to the founders of those companies and ask how well the investors executed their strategy. Did they have results? What was the process like?
- Ask about the company’s cultural transition. How did the founder feel moving from being at the top to being more of an employee or manager? Was it a good culture overall? Were the employees happy that they stayed?
- Find an outside advisor.
Private equity is a small specialty in the financial sector and doesn’t do a lot of deals, so news like the Spanx deal gets a lot of attention. Equity investment also gets a lot of informal (and often uninformed) word-of-mouth coverage; other business owners will sometimes make decisions based on this. An expert advisor can get you the right information to make the right decision for you. Going the private equity route could be a lucrative exit plan for your business, so it’s worth considering.
Related: Private Equity is Vital to Entrepreneurs as it Grows and Adapts to Changes on the Horizon
Begin with the exit in mind
Before you do any of this, have a full exit plan and succession strategy that spells out what the end looks like and how you can best get there. Don’t only consider the valuation you want but also look at how you want the transition to proceed – from details like how you want employees taken care of to big-picture goals like the legacy you leave. Sit down and give some real thought to your exit strategy.
Exhaust all your growth opportunities before you bring in outsiders, and they’re more likely to seek you out.
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Jessica Fialkovich