“My wife wrote a thesis in the early 90s when she got her Master’s at Duke. So now I need one, too?” Perry (not his real name) was 53 years old and ready to sell his company. He had built his business over 20 years to be worth close to $40 million. He loved going to work every day, but recent private equity consolidation in his industry got him thinking 2024 was the right year to exit.
Perry and I did a considerable amount of analysis before he decided to take his company to market. We compared the value of his company today versus the present value of keeping the company another five years. We evaluated the strength of his management team to understand if he’d be able to walk away at closing or be needed to stay on some kind of earn out. We also spent time with his personal financial planner thinking through potential deal terms to maximize his family’s wealth over the next 30 years (100% cash at closing is not always the best payment option, but that’s a blog for another time).
Once we completed this homework, we had a clear sense of what price and terms Perry would expect, and what his post-sale life would look like. At that point, I started discussions with the private equity groups investing in his industry. It didn’t take long for indications of interest to start rolling in. As we reviewed the submissions, we realized each private equity firm had a different take on how they saw the industry. Moreover, we discovered each private equity firm had a different set of assumptions about the kind of companies they wanted to buy ,and how they’d maximize their investment in the future. In private equity parlance, this is called a “thesis.” I quickly comforted Perry that he wasn’t going to have to write a laborious document like his wife did in college, that’s a different kind of thesis. In private equity terms, a thesis is the set of assumptions that create the firm’s investment strategy. Simply said, while there were several PE firms investing in the same industry as Perry’s company, that didn’t mean each of those firms would be equally interested in Perry’s company. We had to go through a detailed set of discussions with each firm to determine if their thesis was consistent with how Perry saw the future of his industry, and the kind of deal necessary for him to see his objectives fulfilled.
You’ve heard the phrase “the right buyer,” and probably assumed that meant the one who offers the most money. That can be true in some situations, but in dealing with private equity, the “right buyer” is the one whose thesis is consistent with the seller’s business model and view of the future. If you figure this out early in the process of selling your company, you will save yourself time and be more likely to exit on your terms.
Tennessee Valley Group
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