If you're fortunate to own a thriving company, you may have thought what it might be like to sell your business. A private equity company may even have already approached you with such an offer. But before you pull the trigger on a deal to sell your company, or even part of it, there are three things you need to know first about how a private equity investor thinks. Specifically, that private equity firms really only make three critical decisions--and they focus all their energy on these three issues.

What Company Should We Buy?

The first thing private equity investors decide is what companies should they buy or invest in. Just as importantly, they are looking for ways to buy companies in a way they can easily make money. This is where their banking skills come into play. If they can properly structure a deal with the right preferences and operating agreement, they know that even if a company performs at an average level, they can make their target return.

This equation has begun to change, however. These days, private equity firms have begun to claim they can offer more of an operational involvement to their portfolio companies. They say they have the potential to add connections, synergies with other portfolio firms and new clients to help a company they invest in to grow faster than it otherwise might. But the truth is that while these investors are really smart bankers, most of them have never run a company before. So even if they claim they can offer an operational advantage to the company, it's actually quite rare when that proves true. So don't expect too much.

Do We Need a New CEO?

The second thing you should know about how private equity investors think is that as soon as they make their investment, they're already asking if they should fire the CEO - you. It's all too common for a founder and CEO to be replaced soon after a sale; it happens more than you think. That's mostly because most founders run the company for the long term and own benefit rather than for the benefit of an investor who prioritizes short-term cash flow or the payoff of an exit. If you, as the founder and CEO of an acquired company, don't adjust to your new environment, you could soon find yourself in hot water.

Sometimes the problem could even stem from the price the investors paid for your company. While everyone wants to maximize the price they get for their business, you also need to be selling realistic financial expectations for your business. There's no quicker way to find yourself on the outside looking in than if your investor paid a high multiple for the business based on your forecasts and then you miss those forecasts in the first year. That said, getting replaced isn't always the worst-case scenario, especially if you maintain an ownership stake in the business. While it might be a blow to your ego, it's quite possible that a new superstar CEO could take the business to heights you couldn't have pulled off on your own. But you should be ready to get fired.

When Should We Sell?

The third thing you need to know about what private equity investors think about is their decision about when to sell the company. They buy companies so they can sell them--simple. The timing of that usually comes down to a couple of factors. The first is have they made enough of a return to be happy? Most investors would consider a three- to five-times return on their initial investor to be a win--though a ten-time return is considered a real home run, albeit a rare one.

The other key factor is how long the investor has been a part of the company. Most funds have a life cycle of between five and seven years before they turn over. So, depending on how old the fund is when they invest in your firm, you can learn a lot about the potential timing of the next sale. Now, most funds will hold onto an investment for at least two years after the initial acquisition. But as you move into years three to five, most private equity investors will begin to work at determining the market value for the firm with an eye on finding a way to exit it. And realize, that many times--you won't have a say in the timing--you will just be along for the (hopefully lucrative) ride.

Selling your company to a private equity company can be an enormously exciting and profitable event for a founder and CEO. Just do some homework before you pull the trigger on how these investors think before you pull the trigger so you know what you're getting into.

Published on: May 19, 2015
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