Private equity groups have specific goals they are seeking to meet, and these goals should be taken into account by sellers when considering whether or not to proceed with a sale. Checklists are helpful in ensuring all relevant issues in a deal have been identified. Before signing any agreement with a private equity group, make sure you first have answers to the following basic deal principles.
1. Exit strategy of private equity group.
Starting with the end in mind, private equity groups typically look to purchase businesses with the goal of growing and selling the business in 5-7 years at a higher price. Rather than assume this to be the case, it would be prudent to confirm the strategy involved.
2. Growth measures to be undertaken.
A good private equity group will already have identified how it intends to grow the business. This could be done in a number of different ways like fund injections for new opportunities or internal improvements to boost operations. The operative word here is growth, and any potential buyer should be able to articulate their vision. The plan for growth should inform how performance targets and other deal-related measures are set.
3. Owner’s role after sale.
Some private equity groups will want the owner to run the business after the sale or even maintain a minority equity interest in the business. Other groups may not want the owner or existing management team to remain tied to the business. It is important to verify exactly what rights and responsibilities the soon-to-be former owner will have in operating the business and how any phase out of management is to happen. It should be reasonable for a potential buyer to be able to share these details because they are central to the exit strategy and plan for growth.
4. Incentives to support growth.
The idea of keeping the owner on after the sale is to have that person lead the effort in growing the business. It is important then to make sure the financial incentives provided to the owner match the goals being set for growth. The more specific these goals can be, the better they can help maintain the partnership relationship between the owner and private equity group.
Selling your business to private equity has a better chance of succeeding if the expectations on both sides of the deal are aligned. Using this checklist will help you with this process. Strobl is a team of experienced and trusted lawyers that can advise on all matters relating to the sale of a company and mergers and acquisitions. For more information, visit Strobl online at www.stroblandsharp.com or on LinkedIn.