How to Partner with a Private Equity Firm – Start with a Mirror and Patience

Andrew Weinberg, Founder, Managing Partner & CEO of Brightstar Capital Partners contributes to

To see this article in Forbes, please click here.

Most owners of successful middle market businesses will eventually have a conversation with potential private equity investors. We recently polled some 50 family business owners, and 87% said they would consider bringing new owners into their business in the next five years.  Nearly half will do so to fund the growth potential they see, nearly a third to provide liquidity for themselves and existing family owners, and just under a quarter to bring in outside expertise.

In fact, deals for companies with annual revenue between $50 million and $200 million have been a major – and growing – feature of the private equity landscape. In the US, the number of middle market deals grew at an 11% annual rate from 2010 to 2019, and even during the pandemic, nearly 2,000 deals closed in the first three quarters of 2020, according to Pitchbook

But for any partnership with a private equity firm to succeed, it is imperative that family business owners know their motivations and goals for selling the business, look in the mirror, and have patience to navigate the process.

Change Ownership Graph Next 5 Years

Here’s how owners should consider approaching a conversation with a private equity firm. The first step involves looking in the mirror, in the figurative sense. One owner of a successful middle market business, who ultimately sold it to a private equity firm, explains the internal “mirror” discussion like this: “If you want to sell the business because you want to enjoy your life and buy a house or a boat, that’s cool.  You’ve earned it.  If you truly need or want growth capital but love the business and want to stay active in that business, that’s awesome, too. No matter what, you have got to find the right partner, because the worst thing that you can do is bring in a partner and not reach your personal success goals, whatever those are.”

As you look in the mirror, it’s important to have a good initial list of questions to start the internal conversation:

  • What are your personal goals in selling the business?
  • Is price your primary consideration?
  • How much involvement do you want in the business post-sale?
  • Are you comfortable with ceding control of the business?
  • How can you optimize both the sale of the business and the subsequent wealth event?
  • What resources will the business require from a new PE partner, beyond capital alone, to grow and thrive?

Only the owner can give the answers to those questions, which will: a) determine if a partnership with a private equity firm is the right move, and b) define the boundaries for any such partnership. 

The answers to those questions will also help determine which of the many potential private equity partner firms align with the owner’s goals.  Private equity is not a monolith; firms have different skill sets and investment theses. A passive investor might offer capital and otherwise be hands-off, while other firms, like ours at Brightstar Capital Partners, are hands-on operational partners who roll up their sleeves and contribute knowledge and perspective. A firm that will outbid others aggressively on price will also need to be more aggressive in its financial engineering of the company they buy.

In our survey, over half of the family business owners viewed short-term financial motivation as a concern with private equity, and 45% worried that private equity firms would not adequately respect the legacy of the business. Those are legitimate concerns, and in my view can only be addressed by building a trusted and mutually respectful relationship.

For this reason, patience is the next most important tool in selling a business.  Finding the right partner, as in any relationship, takes time. I’ve had many experiences where we finally reached an agreement years after initial conversations. On average, business owners should expect to spend about three years from thinking about selling their company to the day when the deal is done.

But patience is not procrastination. There are numerous things, such as third-party audits, or a review of the company’s competitive positioning and capital needs, that an owner should do as soon as the thought of selling enters one’s mind.  It’s important to think about the needs of the business in such a way that others would want to buy it – but that it would also thrive if you decided to keep it. As one of our partners likes to say, “We all clean our houses before a party and maybe even get the outdoor ice maker working again and that kind of thing. And you think to yourself, ‘Why didn’t I do that six months ago?’ It’s the same thing with your company.  Don’t wait till you have the party, go ahead and get your house cleaned and painted up now. Prepare the company, keep in good order as if you were getting ready to show it to a buyer.  And that way you can enjoy it. Whether you own it or intend to sell it.”

In this way, the business owner will always keep the big picture in focus and not lose control throughout the process, even if it leads to a decision not to sell.  And this is how it should be — for all the headlines about private equity, the true “masters of the universe” are the founders, families and entrepreneurs who build successful companies.  To forget this is to deny economic reality.