Private equity is an attractive exit strategy for owners who are looking to diversify their holdings now and exit in the future, and the private equity market is expected to grow significantly in the coming years.
The US private equity market is anticipated to increase from $460 billion in 2024 to $765 billion by 2027 – that is a compound annual growth rate (CARGS) of 11%.
Here are the advantages and disadvantages of working with a private equity group (PEG) to exit your business:
Advantages of Working With A Private Equity Group:
- Access to Capital –
A private equity group (PEG) usually brings significant financial resources that can help a business owner grow their business, invest in new markets, and scale operations.
- Strategic Expertise –
Many private equity groups (PEG) offer valuable operational and strategic guidance, by leveraging their industry experience and networks.
- Partial Exit Option –
As a seller, a business owner has the opportunity to sell a portion of the business today, diversify their assets while retaining a stake in the business, and participate in the future growth and profits of the business (often referred to as “taking a second bite of the apple.”)
- Enhanced Value Creation –
Private Equity Groups (PEGs) bring expertise to maximize the value of the business through operational improvements, acquisitions, or restructuring.
- Speed and Certainty –
Private equity deals often close faster than sales to strategic buyers, providing the seller with both liquidity and reduced uncertainty.
- 6. Aligned Interests –
PEGs are often motivated to grow a company quickly to achieve a strong return on investment, which can align with an exiting owner’s goals if he or she were to stay involved.
Disadvantages of Working With A Private Equity Group:
- Loss of Control –
Private equity firms often demand significant or majority control, which can limit a seller’s future decision-making authority in the business.
- Short-Term Focus –
Many private equity firms operate on a three- (3) to seven- (7) year exit timeline, which may lead to decisions focused on quick returns rather than long-term sustainability.
- Debt Financing –
Private equity firms often use leveraged buyouts (LBOs), increasing the company’s debt burden, which can be risky in economic downturns.
- Cultural Changes –
The introduction of new management practices or restructuring efforts can lead to cultural shifts that may not align with the company’s history, vision, mission, or values.
- Pressure for Performance –
Private equity firms often set aggressive growth and profit targets, which may create operational or employee-related challenges.
- Reduced Legacy Control –
If legacy preservation or the business’s long-term mission is a priority, selling to a private equity group might compromise those goals.
In summary, selling to a private equity group (PEG) can be a strategic move to access capital and expertise but it comes with trade-offs, like reduced control and potential cultural shifts.
An exiting business owner should carefully evaluate the PE firm’s track record, goals, and vision for the business to ensure that the terms of the deal reflect his or her personal and professional priorities. Consulting with legal and financial advisors is also recommended to make an informed decision about engaging a PE firm to exit your business.
About the Author:
James J. Talerico, Jr. CMC ® CBEC ® is an award-winning author, speaker, and a nationally recognized small to mid-sized (SMB) business expert.
With more than thirty- (30) years of diversified business experience, Jim has a solid track record and an A+ BBB rating helping thousands of business owners across the US and in Canada tackle tough business problems to improve the performance of their organizations.
His client success stories have been highlighted in the Wall St. Journal, Dallas Business Journal, Chicago Daily Herald, and on MSNBC’s Your Business. He was named “Texas Business Consulting CEO of the Year,” by CEO Today Magazine, identified as a “Top 10 Management Consulting Entrepreneur to Watch in 2023” by Entrepreneur Magazine, was listed among the “10 Most Visionary Companies to Watch in 2023” by Inc. Magazine, and has also been ranked among the “Top Small Business Consultants” followed on Twitter.
For more than half a decade, Jim was a regular guest on “The Price of Business,” a nationally syndicated radio program on Bloomberg Talk Radio and has also appeared as a subject matter expert on many FOX Radio interviews. He is a regular contributor to several blog sites and has frequently been quoted in publications like the New York Times, Dallas Morning News, Philadelphia Inquirer, The Entrepreneur’s Review, and on INC.com, in addition to numerous, other industry publications, radio broadcasts, business books, and Internet media.
Jim received a Gold “Stevie Award” for “Thought Leader of the Year,” a Gold “Stevie Award” for “Media Hero of the Year During Covid” and a Bronze “Stevie Award” for “Best Entrepreneur” in the Category of “Business and Professional Services” at the American Business Awards ® in New York City. The competition received more than 3,700 nominations and is the premier accolade for business excellence in the US honoring organizations of all sizes and industries. Jim also received an “Outstanding Leadership Award” at the Money 2.0 Conference for his contributions to the financial services industry.
Jim is the author of “8 Steps to Becoming an ETHICS FOCUSED ORGANIZATION,”™ a small business certification program that utilizes a unique eight – (8) step approach for strengthening ethics in any organization. The certification program won the Better Business Bureau’s “Torch Award for Ethics” for the North – Central Texas Region, the International Better Business Bureau’s “ Torch Award for Ethics,” and a Gold “Stevie Award” for “Ethics in Sales” at the International Sales & Customer Service Stevie Awards ®. Participants who complete this certification program are eligible to receive eight – (8) continuing education units from the University of Texas’ Division of Enterprise Development.
Jim received his Certified Business Exit Consultant (CBEC) ® designation from The International Exit Planning Association (IEPA) to help entrepreneurs, small business owners, family businesses, and middle market companies maximize their business exit, and he received his certification in succession planning from the ASPE. Jim currently serves on the IEPA’s education committee.
Jim is also a Certified Management Consultant (CMC.) ® The Certified Management Consultant ® mark is awarded by the Institute of Management Consultants USA (IMC USA) and represents evidence of the highest standards of consulting, a commitment to continuous development, and an adherence to the ethical canons of the profession. Less than 1% of all consultants in the world are Certified Management Consultants (CMC.) ®
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