Selling Your Business: Private Equity Misconceptions Many Business Owners Face

By Ellie Pigott

Selling your business can provide you with financial flexibility, free up time from day-to-day responsibilities, allow for retirement or lifestyle changes and much more. However, many businesses owners are hesitant due to common private equity misconceptions. Some of these PE misconceptions and fears include incoming layoffs, “stripping and flipping”, strategic misalignments, loss of control, and impact on company culture. In this blog, we’ll dive in and debunk these common private equity misconceptions and help you set up your exit for success.  

1. Misconception: Strategic Misalignments 

A common fear or misconception amongst business owners is that the private equity firm’s strategy doesn’t align with the company’s mission. It’s not unlikely you will encounter these firms in the process of selling your business, but thorough due diligence and clear discussions during the negotiation process will help determine alignment on strategic goals. Business owners should choose a PE partner whose vision aligns with the long-term objectives of the company. Sometimes this results in taking less money upfront to benefit the overall well-being of the company.  

2. Misconception: Stripping and Flipping 

Within the broader definition of strategic misalignments, many businesses owners are weary of PEs because of their reputation to “strip and flip” the businesses they purchase. The term “strip and flip” refers to selling off valuable assets of a company and then selling the restructured entity. This model is used by some, but similarly to points made in “Common VC Misconceptions Many Founders Face”, not all PEs share the same model. Some common PE models include distressed investing (focus on purchasing companies that are going under) and growth equity (additional funding to add value and grow a business). When considering different buyers for your business, look at their firm’s model and consider what that might look like when applied to your business. 

When acquiring companies, Traction Capital exclusively uses a growth equity mindset. Traction intentionally seeks out companies where they can offer experience and a proven process to foster growth. 

3. Misconception: Selling Your Business = Layoffs 

Whether a PE firm uses a “strip and flip” model, or invests through growth equity, incoming layoffs can be a realistic fear but aren’t necessarily imminent. Clear communication and transparency about organizational changes and the role of key personnel are essential. Many private equity firms recognize the value of retaining experienced and talented executives and key employees. As such, part of the acquisition strategy often includes efforts to retain and incentivize key personnel. This may involve offering performance-based incentives, equity participation, or other retention measures.  

4. Misconception: Loss of Control and Impact on Company Culture 

Many businesses owners spend years growing and nurturing their business and fear losing complete control when they sell. As many items discussed in this blog, communication in the company vision is key and if continued involvement is desired it needs to be articulated. Instead of a purely hierarchical relationship, some private equity firms view the ownership transition as a partnership. They understand that the success of the business relies on a collaborative effort between the existing management team and the new ownership structure.  

This means owners and key executives may still be actively involved in strategic decisions, business planning, and day-to-day operations. While there may be changes in reporting structures, the goal is often to maintain continuity and benefit from the collective insights of both the existing and new leadership. Culture often plays an important role in this, ensuring values and company mission remain constant helps ensure a smooth transition. 

Next Steps in Selling Your Business 

While daunting at first, selling your business could provide much desired financial and lifestyle flexibility. By debunking the common private equity misconceptions many business owners face, you can be better informed when considering selling your own business.  

If you’re interested in selling your business to a growth equity PE firm or want to know more about what the process might look like, reach out to us at cooper@tractioncapital.com 

 

Keep reading: