Selling Your Business to Private Equity: What to Know Going In

Private equity can be a great home for a business, but not all funds are the same. Know whether you're the platform or an add-on, and look past the headline price.

Not tax or legal advice. This article is general information based on my own experience selling a business. Every business and deal is different. Talk with your own CPA, attorney and financial advisor before acting on anything here.

The short answer

Private equity can be a good buyer, and my experience selling to one was positive. But funds differ a lot. Find out whether you'd be the fund's platform (the first company they build around, which usually commands a higher price) or an add-on folded into another company. Look past the headline price to what's paid at closing, held in escrow or tied to an earnout. And ask directly what happens to your team.

Platform or add-on

A fund often buys one company in a region or industry, then buys smaller companies and folds them in. The first is the platform; the rest are add-ons. Platforms usually get higher prices because the fund is buying the management team and systems everything else will run on. I traded notes with the owner of a commercial HVAC company who sold well above the usual multiple in their industry for exactly that reason.

Private equity is buying field-service businesses like HVAC, plumbing and electrical companies in many markets right now.

The price isn't the whole deal

In my case, almost all of the price was paid at closing. Escrow held back almost ten percent, and there was an earnout, paid only if the business hit targets after the sale. It wasn't huge, but it was a meaningful amount, and we negotiated it down. There is much more to negotiate than the price. See what's negotiable besides the price.

The worry about private equity is fair

What happens to employees, culture and customers once the fund's plan kicks in? Ask that out loud. Some funds are great partners; mine was. Some aren't. Talk to owners who have sold to them before.

For many owners, especially when the kids don't want the business, private equity can be the best home available, and not only financially.

Two questions to ask any private equity firm that calls

Are we your platform or an add-on?
What happens to my team after the first year?

Should you sell your business to private equity?