Startups: Is it the Right Time to Seek Private Equity?

Seeking private equity is a big decision. It means selling your company, which will bring a lot of changes for you professionally and personally. If you’ve been thinking more and more about seeking a private equity partner, it’s important to pause and reflect. Is this the right time for you?

Think of selling your company like selling a house. Assuming there is not a life event that is somewhat forcing your hand, you will have the luxury to pick the time that is right for you. Being thoughtful about when you sell can ensure a smoother transition for you and the company and possibly result in a better sale price as well.

To decide whether it’s the right time to seek a private equity partnership, you need to start with introspection and then talk to the other people who will be most affected before finally bringing in experts to consult.

Start with Introspection

As the founder, the decision to seek private equity or not ultimately comes down to you. Before choosing the path, it’s important to do some introspection and make sure this choice is best for you and your company.

Ask yourself questions like these:

  • Have I taken the company as far as I can?
  • Is it time to let new energy take the company through its next growth?
  • As I look to the next big growth area, do I have the capital and expertise to properly execute?
  • Have I included all who should benefit from the anticipated wealth creation?
  • Should I start thinking about retirement or taking a lesser role?
  • Has my succession plan changed as family members step away from the company?
  • Could I realize some of the value of the company to create a more secure future for my family?

These are all natural questions, and you should not feel guilty about realizing some value for your efforts while setting the stage for those who will come behind you to reap their own benefits. But you need to think long and hard about the future and make sure this is the path you want to go down, because once you enter a private equity partnership, it’s nearly impossible to go back.

Talk to Others

While this is ultimately your decision, others will be affected. After determining that a private equity partnership is what you want, you need to discuss it with the important people in your life, both personal and professional.

If you have a spouse or partner, they should be the first person you bounce these ideas off of. They know you the best and have seen firsthand the passion that has driven you to wake up early every morning and go to bed late each night. More likely than not, this person has sacrificed the most as you have built your vision.

If that goes well, the next set of people you want to discuss this with is your most trusted management team. They know the business and the current state of things. You want to observe their reaction to this potential change of course. Are they excited or nervous?

It is important to have a frank and honest conversation. Do not hijack an existing management meeting. Instead, call a special meeting, ideally off-site away from the daily noise of operations where people can feel free to think through the implications of your new idea.

More likely than not, they are new to the private equity space and will have a ton of logistical questions. The key to this communication is being completely open and transparent about your motivations.

Once you have your management team up to speed, you all need to figure out collectively when the time is right to start the process. Returning to the house-selling analogy, you and your management team need to decide if your house is ready to be shown. Are there any repairs that you could tackle that will remove potential friction from a would-be buyer? Are there seasonal considerations that should be taken into account?

Consult Experts

Once you have reached the stage of knowing you wish to sell and getting the key players on board, you need to bring in the experts to walk you through the logistics. 

When selling a house, finding the right realtor can be as important as finding the right buyer. In this world, the “realtor” is usually an investment banker or mergers & acquisitions’ expert. These are the people who will guide you through the complete process, getting all the necessary information from you so they can produce the materials that will attract the right buyers. 

First, reach out to your accountant or bank manager. If you utilize the services of one of the top twenty accountancy firms in the country, they will have experience in this process and will be able to recommend several mergers & acquisitions’ experts that specialize in your area. Failing that, your bank will most definitely be able to recommend someone. 

Do not rush this stage. Choosing your representative for this process can make a world of difference. You will want to find someone that has a good track record of positioning companies like yours and successfully closing the transactions to the right buyers.

You will also need legal counsel, specializing in corporate purchases, and a good tax advisor who can guide you through your tax liability as you negotiate various avenues. Find an attorney with a deep understanding of mergers & acquisitions case law, customs, and terminology who also has knowledge of your particular situation, risk tolerance, and transaction goals. 

It’s important to engage these experts well in advance of finding your private equity partner—the earlier, the better. Budget at least six months to give your attorney time to review your books and records from a legal perspective. Allotting one to two years would be even better, as it will give your attorney time to work on tax planning and transaction incentives for employees.

Take Your Time

There is no immediate rush here. Six months here, six months there is not going to make a whole lot of difference, so do not feel you are pressured into making an immediate decision. 

An investment transaction like this may only happen once or twice in your life. So take your time to ensure it’s the right decision for you. Then, once you get your family and business team on board, you can consult experts.

By putting thought into not only if but when you want to seek a private equity partnership, you can navigate this rare opportunity as smoothly and efficiently as possible. 

Kelley W. Powell is CEO and partner of MacLaurin Group, a company providing technology operating partner services to portfolios of private equity companies. Powell is also author of “Courage to Lose Sight of Shore.”