FREE TRAINING: 3 Keys to Sell Your Business with Confidence

The 3 to 4 in 5 to 6 Flip

“I want to sell my company in 2023. I’ve loved being a business owner for 25 years, but I’m ready to enjoy my harvest and let somebody else take it from here. But no way in hell do I want to sell to private equity.

Stan (not his real name) is looking at an eight-figure payday when his company is sold. Given the state of the market and the tip-top shape by which he has run his business, we will likely have a deal done within nine months.

For what reasons I’m not sure, Stan has developed an antipathy toward private equity, often referred to as financial buyers. “All private equity wants to do is come in here, make a bunch of changes and sell it again in five years,” Stan said as we discussed our go-to-market strategy. “You gotta find me a buyer that’ll pay a fair price but not tear my place apart after I’m gone.”

I told Stan his image of private equity might be a bit of a caricature. The generalization that all private equity are short-term flip artists is unfair, though admittedly, most private equity firms do need a 3 to 4 times return on invested equity within 5 to 6 years. What Stan fears can happen when financial buyers must make difficult decisions about the business, but that doesn’t mean it happens every time

I went on to explain to Stan that “fear of the flip” shouldn’t drive a blanket decision to not talk to any financial buyers. While “3 to 4 in 5 to 6” is the basic mantra of most private equity, there is a subset of financial buyers that can be patient over a longer term. These financial investors are willing to look at 10+ year holding periods. After all, if you can buy a business for 7X EBITDA using 35% debt and the business does not experience material underperformance, the financial buyer will see stable annual returns nearing 20%.

Encouraged by this perspective, Stan asked me to create an outreach effort to identify these long-term financial buyers. To be clear, I explained to Stan that a financial buyer with a long-term perspective didn’t ensure the business would face no disruptions. Obviously, the new owner can do what needs to be done to protect their financial interest. Stan understood but was at least encouraged that we could find a financial buyer that brings a long-term hold perspective. 

I also had to explain to Stan that there could be a downside to this strategy. This subset of financial buyers might lean a tad more conservative in their valuation, so Stan might pay a price for his desire to have a long-term buyer in place. Stan was comfortable with that possibility. “I can sleep better after the sale knowing my long-term loyal employees are less likely to be part of the flip,” he said.  With that, let the buyer search begin. 

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Tennessee Valley Group

Jim is an attorney (non-resident status with the Missouri Bar) and though he no longer practices law, he has read and negotiated enough legal documents to fill a cargo tanker. He has an MBA from Harvard Business School and knows how Wall Street and private equity operates. Jim is a Tennessee Supreme Court Rule 31 listed general civil mediator with tons of experience helping business owners (large and small) work through sensitive problems to achieve winning results. He is the author of "Home Run, A Pro's Guide to Selling Your Business, Seven Principles to Make Your Company Irresistible."

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