Business Exit Strategy Guide for Owners: Selling Your Business to Private Equity

Business Exit Strategy Guide for Owners: Selling Your Business to Private Equity

Selling your business to private equity is a potentially very lucrative business exit strategy. In fact, the second sale — when the PE firm sells the company outright to recoup its initial investment — can be even more lucrative than the first deal when you sell to a PE firm.

But selling your business to a private equity fund is a complicated sale process and you could end up partners for a number of years before getting a big buyout when the second sale closes. So it’s important to understand all of the ins and outs before embarking on this path.

Here, we share 9 important questions you should ask if you are considering selling your business to private equity.

What do PE Funds Look for in a Company?

Private equity firms typically invest in companies that are undervalued or have the potential for growth. The firm will then work with the company to improve its operations and increase its value. Once the company has been improved, the private equity firm will sell it for a profit.

Will the PE Fund Own the Company?

Private equity investors are strategic buyers. The deal structure likely will give the PE fund a majority ownership stake — perhaps as much as 80 percent of the company. The current owners will be expected to retain the remaining ownership stake.

Why? Because the PE fund wants to know that the entrepreneur who started and grew the company will retain a financial interest in its future success via the equity investment.

When the prior owners stick around and remain invested in the success of the business it helps ensure a smoother transition, thereby lowering risk. In addition, it signals to the new investors that the existing owners remain confident in the organization’s prospects. 

Some private equity groups will not do a deal where the existing owners are not rolling forward a “meaningful” investment, although the definition of “meaningful” can vary widely.

How Much Debt Will the Deal Incur?

When a private equity buyer sets up a deal as a leveraged buyout, it means the deal will be financed with debt and the business will need to service that debt (interest and principal). That reduces the amount of cash available for distribution or to invest in future growth.  

You want to understand the terms of that financing so you will not be surprised post-closing when a portion of your company’s cash flow is used to service debt rather than be distributed to you or used to invest in growth. 

What Will the PE Fund Expect of You?

Oftentimes, the PE fund business model calls for buying the management team as much as the company. That means the fund will expect you and your leadership team to stay on for a set period.

But this won’t be business as you have done it in the past. You’ll be managing someone else’s investment. That likely will require that you generate any number of financial reports, all of which will likely be far more complex than any your CPA has had to generate in the past. Bringing in a skilled interim Chief Financial Officer can be critical to meeting that challenge (and may even be required by the investment fund).

Also, remember that if you don’t hit the numbers the fund is expecting, you likely will get some “help” — whether you want it or not. And you may have to pay a fee for that help you didn’t want.

Will the PE Fund Take an Active Management Role in the Business?

Selling to a private equity firm can be a great experience for you. With the right partner, you will get a great sounding board, someone who has had lots of experience growing companies, and someone who can help you weather the inevitable storms that come with running a business. 

Where Did the PE Fund Get the Investment Capital?

Private equity firms raise money from insurance companies, endowments, high-net-worth individuals, and other institutions, and then invests that money in other companies.

Understanding the source of the investment capital can offer insights into the fund’s objectives, risk profile, and exit strategy.

For example, a fund that gets most of its capital from insurance companies is likely to have a more conservative investment style, buying companies for the longer term and exiting via an initial public offering (IPO). 

Conversely, a company investing funds from a hedge fund or high-net-worth individuals might take a more aggressive approach, looking to recoup the investment over a shorter period of time via a second bite sale or merger with another company.

What Other Companies Has the Fund Invested In?

It’s important to understand the fund’s investing experience because it is a strong clue as to how much knowledge the fund has about your industry. For example, a company with a history of successfully investing in healthcare companies may not have the expertise needed to capitalize on an investment in a real estate company or a widget maker.

What is the Fund’s Track Record?

Your due diligence on any PE fund that is interested in investing in the company should include a deep dive into the fund’s previous investments. You’ll want to know what returns the fund has generated for its investors and other business owners.

What Fees Will the Fund Charge?

Private equity firms typically take 15-25% of the returns generated by their investments, a fee known as the firm’s “carry” or “carried interest”). 

In addition, they may charge their portfolio companies add-on management fees. For small businesses, the fees may not be much, but for middle market and larger firms, they can reach into the millions — fees that have to be paid out of cash flow and can significantly affect liquidity.


Are you considering selling your company to a PE fund, investment banking firm, or venture capital company? Contact InterimExecs for a confidential consultation about your plans for the future and what the company you have built needs to smoothly transition to new leadership. InterimExecs RED Team of top executives work with owners to develop and execute a strategic plan for exiting your business. That means providing operational expertise to increase the value of your business and putting structure in place so you can successfully change roles or transition out.

Read Our Full Series:

Part 1: Choosing the Exit Strategy that is Right for You

Part 2: The Critical Importance of Business Succession Planning

Part 3: Identifying the Right Successor

Part 4: Family Business Transition to the Next Generation

Part 5: Managing Conflict in a Family Business

Part 6: Selling Your Company to Private Equity