As an entrepreneur, it is likely you started your business out of a passion for an industry, an idea, or a service. That passion, combined with your skills and knowledge, is what allowed it to grow.
However, over time, the growth and success of your business may have naturally pulled you away from the things you’re passionate about and led you to take a more active role in steering the business, as well as overseeing processes that have little to do with your reasons for starting the company in the first place.
An owner-manager of a business in this position may find that selling some or all of their company to a private equity (PE) firm presents the ideal pathway forward.
That’s because PE investment allows owner-managers to monetise part of their interest in the business while retaining some ongoing ownership. By joining forces with a PE firm, an entrepreneur can lessen their engagement in the business and realise some of the value of the company, but still enjoy the benefits of its future growth and success.
In turn, PE firms are often able to contribute to the growth trajectory of the business by providing capital for expansion, acquisitions or technology upgrades for example, and expertise and thereby become a real aid in helping their portfolio companies to scale or gain a competitive advantage in a challenging marketplace.
By joining forces with a PE firm, an entrepreneur can lessen their engagement in the business and realise some of the value of the company, but still enjoy the benefits of its future growth and success.
To demonstrate how this works, let’s consider Skewb, a leading provider of consultancy and digital transformation services and products to the energy and water sector.
Established in 2018, growing quickly and approaching a turning point, its owners were seeking to release some cash from the business so that all their personal wealth was no longer tied up in it. There was also a need to recruit fresh talent with skillsets to help take their business to the next level, as well as a capital structure that enabled the incentivisation of other senior managers. After receiving advice from our team and moving forward with a partial sale to PE firm BGF, Skewb gained an experienced chairman and a clearer internal structure as well as access to growth capital, priming it for future success.
Typically, PE firms back experienced management teams to carry out ambitious yet realistic growth plans over three to five years, with an aim to divest following this period through a full sale, or IPO.
Knowing yourself as an entrepreneur is key.
When PE might not be a good fit
PE investment won’t suit every company. Since PE firms’ success typically depends on achieving strong growth in profits over the investment period, they seek out already profitable businesses, holding a dominant and/or differentiated position in a segment of the market with positive underlying dynamics and with high growth potential.
Rob Britton, Partner at Clearwater, says, “Companies trading in crowded markets where there are many like-for-like competitors would be better matched with a strategic buyer, such as a competitor looking to horizontally integrate or a business in a related industry looking to expand.
Entrepreneurs should also be aware that while selling to a PE firm brings benefits such as realising value and access to investment capital, it will also bring aspects such as a loss of control, a lesser share of future profits, and increased reporting requirements. For those owner-managers who will find it difficult to let others take the driver’s seat in business decisions, for example, if they haven’t had a boss in decades, they could find the idea that they no longer run the company unbearable.”
Knowing yourself as an entrepreneur is key. Part of your plan may be to ultimately exit the company, particularly if you have been working in the business for decades and are not planning for family or employee succession. When selling an ownership stake in the business, this can allow entrepreneurs more time to spend on the projects and activities they enjoyed when they first founded the company or create an eventual pathway for exit.
Cultural fit is a key consideration. PE’s focus on returns and investment timescales might clash with the entrepreneurs’ values or leadership style. However, not all PE firms are the same - it is of paramount importance to find the right partner going forward.
No matter your objectives when selling a share of your company, having an adviser by your side can make the journey smoother and minimise doubt and stress throughout the transaction process.
AUTHOR
Rob Britton
Managing Director
I was a founding member of Clearwater in 2003. We saw the need for a solution-driven, adaptable approach to delivering M&A services to growing entrepreneurial businesses. My 30+ year career has spanned banking and corporate finance. As a Managing Director in the Clearwater Industrials & Chemicals sector team, I have advised on over c.65 deals of all kinds. Having the opportunity to work with interesting people and businesses across a range of sub-sectors, with a focus on the client at the heart of everything we do is what makes the job exciting. There is nothing more satisfying than helping a business owner through the challenges and rigours of a transaction on a day-to-day basis and then delivering the most successful outcome for them.
Knowledge
We don't hide behind jargon and complexity. Instead, we aim to open up the black box of M&A, illuminating the path with clear insight, simplifying the process, and delivering valuable information.
