As an unprecedented amount of wealth gets transferred from one generation to the next, often through family business ownership, many owners are exploring the possibility of bringing in a capital partner to either facilitate the transition or fund growth. For an increasing number of middle market companies, that partner is
often a private equity (PE) firm. In 2021, US private equity firms closed a record 4,121 transactions to acquire middle market businesses—valued at an aggregate $602.6 billion—around 50% higher than the previous record.
How can you as a business owner know when is the right time to bring in a partner, what to expect from such a partnership, and whether a private equity firm’s specific resources, expertise and culture are a good fit? The questions and answers below provide a good starting point for family business owners who face this important decision.
Why would a family business want to partner with a private equity firm?
The answer ultimately comes down to the individual business owner’s goals and aspirations. Some are primarily interested in a liquidity event. Others believe their businesses have exciting growth potential, which can only be realized through the application of fresh capital and additional expertise. The owner who is seeking to “cash out” may want to sell the business through a sale process to the highest bidder, perhaps a larger competitor. Those who want to stay on and grow the enterprise may be better served by finding a PE partner.
What resources can a private equity firm provide to help my business reach its goals?
PE firms are not all cast from the same mold—they have different investment strategies, sector concentrations, and approaches to their portfolio companies. At Brightstar Capital Partners, we believe the ingredients for a successful partnership are not only access to capital, but also an “Us & Us” model of collaboration with owners. We collectively align on a clear vision of the potential of each portfolio company and utilize a team of partners and advisors with strategic and operational experience to help the business reach that potential. In short, we believe in being a partner that can provide more than just capital, also giving your
business access to new markets and expertise that can help take it to the next level.
Can my family and I maintain our involvement in the business under private equity ownership?
Absolutely. I’ve found that, in our most successful investments, the owners’ knowledge of the business and markets, and their relationships with customers and suppliers, are incredibly valuable. Whether the best option is for you to continue to lead the business, or to serve as a strategic advisor on the board of
directors, that role (along with your ownership stake) should be worked out with the PE firm prior to the transaction.
Beyond the sale price, what other factors should I consider?
I would argue that the ability to create longer-term value—not simply the immediate sale price—is the key consideration for owners who plan to remain involved in the business. Having a PE partner who knows your industry sector, and whose team has the relevant knowledge and experience to help scale the business, are critical. Most of all, you need a partner that is aligned with your
goals for the business and with the values upon which it was built—and you can only learn that through extensive discussions.
What’s the best way to engage with a private equity firm; what does the process look like?
There are several foundational steps you should take even before engaging with a PE firm, to put yourself and the business on solid footing. If you have not had an independent audit, you definitely should do so. If the operation has been run informally, with most functions “in the owner’s head”, consider documenting the key processes. Equip yourself with capable, trusted legal and financial advisors. Now, you should be better prepared to have discussions with PE firms about such issues as: whether you will be a co-investor or a minority shareholder, management and board structure, strategic decision-making responsibilities, and, of course, deal structure, valuation and tax implications.
How can I work with a private equity firm to optimize the value of the business for the future?
You’ll want to have in-depth discussions with your potential PE partner about the future opportunities for the business—including growth-oriented strategies in such areas as geographic, channel or product expansion. As part of those discussions, you will want to reach an understanding of the PE firm’s time horizon for realizing
the value of their investment. That will enable you to develop a strategic roadmap and identify the talent, technology, capital, and other resources needed to achieve your collective objectives. To execute on those plans, the PE firm can serve as a source of capital and contribute expertise in such areas as operations, sourcing, marketing, and business development. An acquisition strategy will often be part of the value-creation process. The firm will have a network of relationships to help identify acquisition candidates, and experience in evaluating and integrating
How can I tell if a particular firm is the right partner for me?
Patience is the one of the most important assets in the process of selling a business. Finding the right partner, as in any relationship, takes time. You and your potential PE partners need to get to know one another, and find out if you are aligned on values and vision. Time is an essential part of the process—and an investment in the future success of the business.