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Expert Insight Management

Private Equity 101

There is no question that selling your business is one of the biggest decisions you will make as an owner. Most business owners naturally look to a large strategic or direct competitor as potential buyers, but many overlook private equity (PE) as a logical buyer. 

The biggest difference between a strategic buyer and PE is that PE rarely looks to buy 100 per cent of the business. Their intention is to partner alongside the existing owner or management team over the timeline of their investment. In most situations, PE groups look to purchase anywhere between 51 and 90 per cent of the business.

The option of selling only part of their business can be very enticing for some owners.  A significant percentage of business owners have their net worth tied up in their company. While many of these owners have a need to create liquidity, they often prefer not to sell their business outright. Private equity offers the owner the ability to pull out some of the wealth that has been created in the business, while maintaining control of the business and continuing to drive its growth. Essentially, they get to pull some of their chips off the table.

There are also situations where the owner requires capital to grow but is uncomfortable shouldering the risk that comes with financing the growth on their own. This is another situation where the best solution could be a partial sale to a PE group. Not only will the PE group provide capital to create liquidity for the existing business owner, but they can also inject additional capital to support various growth initiatives. Generally, PE groups have access to capital that isn’t available to the current owner, funding it directly or through one of their banking relationships.  

There are very few situations, whether selling to a strategic or PE group, where the owner gets to walk away from the business after close. In most instances, depending on how key the current owner is to the day-to-day operation of the business, they will be expected to transition the business over a period of one to three years. In fact, most buyers will tie some of the purchase price to this transition period. A sale to a PE group allows the owners to continue to build value over this transition period and take advantage of a second liquidity event that can be even bigger than the first. 

Although there are positives that come with partnering with a PE group, there are several things that need to be considered when determining whether it is the right fit:  

  1. Investment Horizon – Some PE groups are looking to turn their investments over in five to seven years, others may look to hold the investment for a longer term.  
  2. Exit Strategy – The owner needs to clearly plan out their second liquidity event. It could be linked to the eventual sale of the business to another buyer or could be structured into the original sale.
  3. Leverage – PE groups tend to use a greater amount of leverage than what has historically been used in the business. Each PE group will have a differing view of the use of leverage in their business model.
  4. Control – Business owners can struggle with continuing to drive the growth of the business without owning it outright. They need to consider how each PE group operates and how involved they want to be in the day-to-day operations of the business.    

Partnering with a PE group is no different than any other partner, it is important to make sure all parties’ interests are aligned.  While PE may not be an option for everyone, it’s an option worth exploring when considering a transition of your business.

Brett Franklin, CPA, CA
President, MNP Corporate Finance

True North Square
242 Hargrave Street


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