Are you the owner of a private company? Whether you are active in the business or not, selling a part, or all of, your company to a private equity firm may be the solution you are looking for.
Entrepreneurs often start a company out of passion for something, or because they have unique knowledge or insight which they can put to use. As the company grows and becomes more and more successful, entrepreneurs often find themselves spending more time on new types of tasks and activities, activities that often share few similarities with the work that they first fell in love with. If the entrepreneurs want to continue working with what they are passionate about, selling parts of, or all of, the company to a private equity firm could be a strategic decision.
A private equity firm typically invests in companies that show high potential for development in the coming three to five years, and usually aims to sell the companies once that period is over.
There are several factors to consider for companies considering this path. An obvious advantage is that you can realise some of the value of the company while still taking part in the journey going forward. Private equity firms can contribute with capital, competence and partnership. They are often very skilled in recruiting the right experts to their portfolio companies, which in turn allows their companies grow.
Hannes Wallin founded Fractal Design in 2010, in Askim outside of Gothenburg. His company designs and builds chassis for computers, and when he met us they were already doing very well. In the autumn of 2016 he sold the company to the private equity firm Litorina, while Valentum acted as advisor. A year on, Hannes Wallin is predominantly positive about the deal.
“With an active and capable board of directors, I have a new stakeholder on my side”, says Hannes Wallin. “Having an experienced and competent chairman is a bit like having a mentor. Overall, the company has developed a clearer internal structure.”
However, this solution does not suit everyone. First of all, you need to think about what kind of company you own.
Generally, private equity firms favour market leaders in smaller, niche markets. They are often less enthusiastic about companies active in broader markets where there are many similar competitors. In these cases it is better to consider a strategic buyer.
It is also important to be able to accept a loss of control and letting other people take part in the decision making.
“It’s about knowing yourself”, says Gustaf Plyhm, partner at Valentum. “If you’re someone who prefers to work independently and make all the decisions, this is not a recommended solution. You have to be prepared to relinquish control, even though, as entrepreneur and part-owner you will take part in the decision making.”
A way to have your cake and eat it too is to sell a share of your company, normally between 51-80%. This means that you can realise some of the value you have built up, but still enjoy some of the future profits. It may also mean that you will be more willing to take other risks.
But even if you sell the whole company, the long-term plan may still be to step down.
“Someone who wants to gradually lessen their engagement, and eventually leave the company altogether, will be helped by the new owners”, Hannes Wallin from Fractal Design says. “Otherwise it may be difficult to leave when being the founder and entrepreneur.”
Regardless if you choose to sell a part or all of the company, there are many good reasons to ask an advisor for help before completing the deal. Approximately half of all entrepreneurs who are contacted directly by an investor sell without consulting an expert, something which involves many risks.
“Apart from not putting the bid up for auction, thus risking selling at a price which is too low, you will have very little control over what happens to your company after the sale”, says Gustaf Plyhm. “Working with this on a daily basis has given us a deeper understanding of the potential buyers and insight into how they will act after a transaction has been completed. Naturally, the buyer wants to pay as little as possible. We assess the different bids and look for pitfalls to ensure the best possible outcome.”
The three main reasons to sell to a private equity firm:
- Opportunity to realise a lot of value while still being part of the company’s next phase
- Gain access to investment capital, expertise and partnership
- Opportunity to spend more time on what made you start the company in the first place
The three main reasons not to sell to a private equity firm:
- Loss of control
- You will not receive all of the future profits
- Increased reporting requirements
Questions to ask yourself before selling to a private equity firm:
- Can you relinquish control over the company’s future—especially future sales?
- Can you work together with another owner, or do you feel the need to make all the decisions by yourself?