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Tee Up Advisors - Fractional CFO Services
Writer's pictureBob Wang

What to Expect When Selling Your Business to Private Equity

Updated: Sep 20

Fractional CFOs help with Sale to Private Equity

There’s been a lot of buzz lately about private equity (PE) firms buying up businesses of all sizes. On the surface, it all sounds very exciting—a chance to cash in on years of hard work, step back from the daily grind, and secure a future that includes financial stability and perhaps a new chapter in your professional life. But what really happens behind the scenes when you sell your business to a private equity firm?


This guide is designed to provide you with insights into what to expect when selling your business to a PE firm. None of the following points are inherently good or bad. What’s important is understanding what to expect, why the new owners want it that way, and how you can work with your Fractional CFO to better prepare yourself, your team, and your business for the sale.


1. Understanding Debt Utilization


Private equity firms often use debt to finance their acquisitions, a strategy known as leveraged buyouts. By adding debt to the company’s balance sheet, they aim to increase their return on investment (ROI). This debt is used to finance growth, acquisitions, and operational improvements, but it also introduces a level of financial risk.


How to Prepare:

Debt isn’t inherently bad—it can be a powerful tool when used wisely. However, too much debt can be dangerous. A Fractional CFO can help you assess your business’s current debt levels and ensure you are comfortable with the financial structure under new ownership. They can help prepare the business to operate efficiently, even with increased debt, by optimizing cash flow and ensuring that the business remains financially stable.


2. Retention of Leadership


PE firms often prefer to retain the existing leadership team during a transition period, which typically lasts from 6 to 12 months. This allows the new owners to gain a deep understanding of the business’s operations, client relationships, and internal processes. In some cases, they might even insist that the owner remains involved for a more extended period.


How to Prepare:

If your goal is to retire as soon as possible, this can be a challenging situation. A Fractional CFO can help you build a strong management team that can take over your day-to-day responsibilities. By gradually extracting yourself from daily operations, you make your business more attractive to buyers, as it demonstrates that the company can thrive even without your direct involvement. This process might require investment and could temporarily reduce EBITDA, but with the right planning, a CFO can help minimize the impact on the eventual business valuation.


3. Scrutiny of Performance Evaluations


One of the most challenging aspects of selling to a PE firm is the scrutiny that your staff will undergo. Employees, especially long-standing ones or family members hired by the owner, may face termination if they are deemed non-performers or economically unjustifiable.


How to Prepare:

It’s crucial to objectively assess your team’s performance before entering negotiations. For key roles that are underperforming, it’s better to address these issues early so that the buyer doesn’t reduce your business valuation. For non-key roles, you might have some flexibility, but it’s still essential to have a replacement plan to ensure a smooth transition. A Fractional CFO can assist in these assessments and help you make the necessary changes.


4. Potential for Dismissal


While PE firms might initially retain the leadership, there’s always a risk of being dismissed if fundamental disagreements arise over the business’s management or strategic direction. PE firms are focused on maximizing their ROI, and if they believe changes are necessary to achieve that goal, they won’t hesitate to make them.


How to Prepare:

Just as the buyer will be conducting due diligence on your business, you should be doing the same on the buyer. Your Fractional CFO can help you request their business plan, examine their balance sheet, and engage directly with the decision-makers to understand their goals. Understanding the PE firm’s exit timeframe and their management fees will give you insights into their underlying incentives and how quickly or slowly they want to grow your business. Additionally, your CFO can help you negotiate compensation agreements that align with the agreed-upon business plan and prepare for worst-case scenarios by securing a protective severance package.


5. Impact on Cash Flow to Owners


Under PE ownership, business owners are often accustomed to distributing earnings among themselves. However, this will likely change once the sale goes through. Owners and partners will be put on a salary with a performance-related bonus. Even if you retain some equity, you might not see any cash flow from it until a second sale of the business occurs, which could be years down the line.


How to Prepare:

Managing stakeholder expectations and cash flow changes is a key responsibility of a CFO. A Fractional CFO can help craft the right narrative to explain these changes, visualize the potential returns from retained equity, and address individual concerns. Ensuring that the business’s culture and cohesiveness are maintained before, during, and after the sale is crucial for both the buyer and the continued success of the business.


6. Navigating Cultural Changes


Selling to a PE firm often brings a more corporate mindset into the business, which can clash with the existing company culture. This cultural shift can affect employee morale and productivity if not managed correctly.


How to Prepare:

Begin thinking about how to bridge potential cultural gaps early in the process. Identify the aspects of your company culture that are non-negotiable and which areas might be open to change. A Fractional CFO can assist in this by helping you communicate these cultural values to the buyer and ensuring that the transition doesn’t disrupt the company’s operations.


7. Understanding the Role of Performance Metrics


PE firms are metrics-driven and will rely heavily on performance data to make decisions. They may introduce new KPIs (Key Performance Indicators) or adjust existing ones to align with their strategic goals.


How to Prepare:

Work with your accountant or bookkeeper and ensure that your financial reporting is robust and that you have a clear understanding of the KPIs that drive your business. A Fractional CFO can help you refine these metrics and ensure they align with the buyer’s expectations. This preparation can prevent surprises and help maintain smooth operations post-sale.


8. Valuation Adjustments


The valuation of your business is a critical component of the sale process, and PE firms are known for their rigorous approach to valuation. They will examine every aspect of your business, looking for ways to adjust the purchase price based on perceived risks or inefficiencies.


How to Prepare:

Work with your Fractional CFO to present a compelling financial narrative that highlights the strengths of your business while addressing any potential weaknesses upfront. This proactive approach can help mitigate valuation discounts and ensure that you receive a fair price for your business.


9. Managing the Transition


The period immediately following the sale is crucial for the long-term success of the transaction. This is when the new owners implement their strategies and make adjustments to align the business with their goals.


How to Prepare:

Your Fractional CFO can play a vital role in managing this transition. They can help ensure that the financial operations remain stable, that the new owners’ strategies are implemented smoothly, and that any potential issues are addressed quickly. This support is critical to maintaining business continuity and ensuring that the sale is successful in the long term.


10. Preparing for an Exit Strategy


Every PE firm has an “exit” strategy, typically within a 3 to 7-year timeframe. Understanding this strategy is key to aligning your goals with those of the buyer and ensuring that you are prepared for what happens after the sale.


How to Prepare:

Work with your Fractional CFO to understand the buyer’s exit strategy and how it might impact your business. This includes planning for the possibility of a second sale, managing your retained equity, and preparing for any changes that might occur once the PE firm exits.


Conclusion


Selling your business to a private equity firm is a complex process with many moving parts. Understanding what to expect and how to navigate these changes is crucial to ensuring a successful transition. By working closely with your Fractional CFO, you can prepare your business, your team, and yourself for this significant change, maximizing the value of your business and securing its future.


At Tee Up Advisors, we specialize in helping businesses like yours build enduringly profitable companies that are ready for whatever comes next. Contact us at info@teeupnextgen.com to learn how we can support you through this process

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