If you have been reading some of the recent articles on the Republican primaries, you may have some concerns about accepting an offer from private equity for your privately held company. After all, didn’t Mitt Romney and his Bain cohorts take over companies, loot them, and then eliminate job after job? Nonsense.
Of, as Jonathan Macey more elegantly puts it in Fridays’s Wall Street Journal, it is “anticapitalist claptrap.” (Mr. Macey is a professor of corporate law, corporate finance and securities law at Yale Law School. His editorial, “How Private Equity Works,” can be found here.)
Mr. Macey explains the workings of private equity well. What I would add is that frequently private equity investors acquire less than 100% of a company, leaving you, the Seller, with a significant minority piece. PE Buyers often recognize that it is in their best interests to keep current management in place, and that current management should either keep (in those cases in which the current management has a significant ownership interest) or is granted equity interests (in those instances in which current management is valued but does not have substantial equity interests). The PE Buyer wants to insure that post closing management’s interest are aligned with their own, and having a shared interest in the growth and profitability of the company can represent a tremendous opportunity for you as the Seller.
PE Buyers have a limited time period – typically 2 to 10 years – during which they will want to improve and then sell or take your company public. That can be an extraordinary financial opportunity for you as a Seller. In effect, you receive a portion of the value of your company when you sell the initial controlling interest to the PE Buyer, and then have a second opportunity, often at a valuation at some multiple of the first, to receive the balance of the sales price. Indeed, some of the most successful transactions I have been involved with involved PE Buyers, and they should be particularly attractive to Sellers who would prefer to continue working with their companies but feel constrained by capital or other limitations – limitations that the PE Buyer can often address.
Are PE Buyers always successful? Of course not….that is how capitalism works.
You are most likely to hear about success or failures of PE investments when there is either a subsequent IPO – because the PE buyers investments become part of the public record – or when there has been a spectacular failure – as bankruptcy or a failure to otherwise pay obligations as they come due also results in public scrutiny. In recent years, however, there have been fewer IPO exits, and so many of the very successful subsequent sales of PE financed companies have gone under the radar. And, as we all know, the difficult economy has resulted in increased business failures across the board.
Do not turn your back on PE Buyers. They play an important role in the economy, and, more important, can be the best possible Buyer for your company.
[And, by the way, I am neither a Republican nor a supporter of Mr. Romney.]