By 2017, fitlosophy had grown to 6 employees, $2 million in top-line revenue and Mader was selling her journals in 16,000 stores including giant retailers like Target, Walgreens and CVS. That’s when CSS Industries (NYSE: CSS) came knocking.
Private equities entities have well prepared specialists who know how to satisfy their interests and buy at very attractive prices. They will be your partners and you will have to trust them when they become part of your company, but before this will happen, they are your opponents and you should be careful to protect your interests. In this article you will learn about six methods you can use when negotiating with a private equity firm.
Consider these recommendations looking at a private equity entity
One of the biggest mistake owners make in selling their business is being lured into a proprietary deal.
The Definition Of A Proprietary Deal
Acquirers land a proprietary deal (or “prop deal”) when they convince owners to sell their businesses without creating a competitive marketplace. Acquirers running a proprietary deal know they don’t have any competition and tend to make weaker offers with more punitive terms because they know nobody else is bidding.
Many founders become the target of a proprietary deal without even knowing they have been duped. First, someone senior from the acquiring company approaches the founder, complimenting them on their business. The acquirer suggests lunch, and then high-level financials are exchanged. Soon, the owner starts going down a path that is difficult to come back from.
As the parties in a proprietary deal get to know one another, founders often share information with the acquirer that puts them in a compromised negotiation position. The interactions are set up as friendly exchanges between two industry leaders, but many founders reveal key facts in these discussions that end up being used against them when negotiations turn serious. Business owners also become more emotionally committed to selling the more resources they invest in the process and the more time they spend thinking—perhaps dreaming—of what it would mean to sell their business..
How To Avoid Getting Taken In By A Proprietary Deal
If you decide to sell your business to an outside acquirer, you’re going to have to decide between a financial and a strategic buyer—understanding the different motivations of these two buyers can be the key to getting a good price for your business.
A financial buyer is acquiring your future profit stream, so they will evaluate your business based on how much profit it is likely to make and how reliable that profit stream is likely to be. The more profit you can convince them your company will produce, the more they will pay for your business.
But there is a limit to how much they will pay, because financial buyers are playing the buy-low, sell-high game. They do not have a strategic rationale for buying your business. They don’t have an army of sales reps to sell your product or a network of retailers where your product could be merchandised. They are simply trying to get a return on their investors’ money, so they tend to buy small and mid-sized businesses using a combination of this investment layered on top of a pile of debt, and they want to buy your business as cheaply as possible with the hope of flipping it five or ten years down the road.
Because financial buyers are usually investors and not operators, they want you and your team to stick around, so they rarely buy all of a business. Instead, they buy a certain amount and ask you to hold on to a tranche of equity to keep you committed.
A strategic buyer is a different opportunity—usually a larger company in your industry, they are evaluating your business based on what it is worth in their hands. They will try and estimate how much of their product or service they can sell if they added you into the mix. Because of their size, this can often lead to buyers who are willing and able to pay much more for your business.
Tom Franceski and his two partners had built their business, DocStar up to 45 employees when they decided to consider selling the business to some Private Equity (PE) investors. The PE people offered four to six times Earnings Before Interest Taxes Depreciation and Amortisation (EBITDA), which Franceski deemed low for a fast-growing software company.
Franceski was then approached by a strategic acquirer called Epicor, which is a global software business with a lot of customers who could use what DocStar had built. Epicor offered DocStar around two times revenue—a much larger multiple than the PE firms were offering.
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