3 Misconceptions of Selling to Private Equity Firms

Dani Sherrets, M&A Manager

July 26, 2018

3 Misconceptions of Selling to Private Equity Firms

There are some misconceptions among business owners about private equity (PE) firms. Many feel that PE firms will pursue layoffs and cost-cutting in order to boost profits and quickly sell the company at a higher price. While the end goal is ultimately to sell companies at a higher price, most PE firms place their bets on businesses with strong growth prospects in attractive markets in order to boost their returns. This often means additional investment, whether financial or human capital, to support an acquired company's potential. The goal is more often to grow and expand rather than cost-cutting.

1. All Private Equity Firms are Alike

There is more than one type of private equity firm. Some are primarily sources of capital with dedicated funds. Some have their own dedicated funds but also have operating partners as part of their team. Others do not have dedicated funds and may or may not have operationally focused team members. In the majority of cases, all of these firms will be seeking to acquire businesses with an established management team and growth potential.

2. Private Equity Firms Assume Operational Control

Private equity firms are not staffed to run portfolio companies they invest in. This would require not only a much higher headcount but also a staff of team members with the ability and experience needed to manage complex businesses on a daily basis. Further, getting existing management to retain part ownership post transaction is typically required by most PEs/ This aligns the interest of the investment firm with company management. It also displays confidence among the existing owners/management in the ongoing success of the business. In many cases, PE firms will seek to add their team members to the board of directors. These individuals are not running day to day operations. Rather, they are active in strategic planning and in the significant decision-making processes. They are also available as consultants or for advice as needed. Firms with operating partners will bring these people into portfolio companies in executive-level roles if needed. This would occur if any of the owner/managers of the business are selling because they wish to retire or if there are holes in the existing team such as the lack of a COO or CFO. However, PE's prefer to find adequately staffed businesses and keep existing management in place. After all, no one knows more about the operations of the business than its current management.

3. Cost Cutting is Inevitable

Cases in which there are layoffs and loss of jobs occur in businesses that are overstaffed or have unnecessarily redundant operations or processes. It's not to say this does not occur with PE firms, however, if it does it is likely in much larger businesses where there are multiple layers of management. Aside from the less frequent cases involving PE firms, restructuring and/or job losses occur more often when a business is bought by another company already operating in its industry, maybe a competitor (aka Strategic Buyer). In these transactions, the two companies likely have duplicate operations that can be eliminated post-transaction resulting in cost savings. These are typically referred to as operational synergies and can be a primary motivational factor in one company acquiring another. In summary, selling to a private equity company often times is not what most business owners would expect. Post-transaction the business continues to operate as it did under the prior ownership, just now with more financial and human capital to support the business' net growth phase.

Learner, Ideation, Achiever, Responsibility, Relator

Dani Sherrets

M&A Manager

Dani Sherrets, M&A Manager, began her career in 2014. She has built extensive expertise in mergers and acquisitions and business valuations.

Specializing in sell-side advisory services, Dani leads deal processes from the initial pitch to final execution. She provides comprehensive transaction support across a range of industries, including retail, manufacturing, and transportation. She thrives in the fast-paced nature of M&A and takes pride in guiding clients toward their strategic objectives while mentoring junior team members.

Dani lives in Omaha, NE, with her husband Bob, children Katrina and Sebastian, dog Princess Leia, and their cat, Spock. Outside the office, she enjoys traveling the world and immersing herself in different cultures.

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3 Misconceptions of Selling to Private Equity Firms

1. All Private Equity Firms are Alike

2. Private Equity Firms Assume Operational Control

3. Cost Cutting is Inevitable

Dani Sherrets

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