Should private equity play a role in your business exit strategy?

The short answer: “It depends.”

The private equity market has more than $13 trillion in assets, with $3 trillion in dry powder not yet committed to deals. These are huge numbers, but private equity is not a monolith. The heavyweight private equity firms making $1B+ deals have very different goals than the mid-market and micro-market firms that seek out the small and midsize businesses we tend to work with.

PE firms have learned that as they move down in acquisition size, they move up in returns. It’s not uncommon for these firms to see 11-15% returns, outperforming the S&P 500. These firms have become very inventive in bundling and optimizing related holdings in their portfolios to create growth. Suffice it to say there is a good chance that someone out there might be interested in you as a deal partner.

But you need to know if their priorities line up with yours and those of your business.

Do you trust your deal partner?

The first question you need to answer is, “Do I trust this firm?” Don’t measure a deal partner by the money they promise. Instead, make them demonstrate that they understand your industry inside out. Seek signs the firm genuinely comprehends your business, not just surface-level knowledge. How many businesses like yours has the PE firm invested in? Find the past owners who have made deals with the firm and speak to them yourself. Find out if they were treated fairly.

Ask about deal structures. The truth is that small- and midsize business owners tend not to have a lot of experience working with private equity. Convoluted earnouts or overly complex terms could prevent you from realizing the full value of your business. Prioritize straightforward agreements that align incentives and foster long-term partnerships. The highest bidder isn't necessarily the best partner; shared values and a collaborative approach matter more.

Geography and reputation matter, too. For better or worse, most of the Texans I work with have an easier time trusting deal partners from Texas, as opposed to a PE shop in New York. Geographic proximity may indicate a stronger grasp of your local market dynamics.

Does the timing work for you?

That said, a trusted private equity partner may not make sense for you if you can’t make the timing work for your own financial life. Private equity firms typically deploy capital over five to six years, not instantly. Your desired exit horizon must sync with their investment period. Leaving sufficient "runway" allows buyers to generate adequate returns post-acquisition. Personal retirement timelines and the "freedom gap" – the span until you can comfortably retire – factor into finding the right selling juncture.

Market conditions and business performance will influence ideal timing, as well. Selling after a good year will give you a very different valuation than if you are trying to exit during a downturn. And given the volatile performance of several businesses between the first years of the pandemic and now, PE firms may be justifiably wary of staking in a business based on one great year.

What does your business mean to you?

Weigh your liquidity needs alongside the lifecycle of the deal. And while you’re at it, devote some thought to what your life will look like after an exit. Many owners derive a lot of purpose from their work, and it’s hard to step away, regardless of whether private equity is involved.

Don’t get me wrong: some sellers are more than ready to hand over the keys and say, “I’m done.” But there is a growing trend in hybrid strategic acquirers to seek out businesses that they can align with complementary acquisitions in their portfolios. How much skin do you want in the game after the deal? Will it bother you if your deal partner makes significant changes to the business you built in order to meet their strategic goals?

Private equity can be a powerful option in your exit strategy toolkit. But it’s an option with a lot of moving parts. If you would like help understanding your choices or vetting a potential deal partner, Masterpiece Capital is happy to help.