Like hairstyles, founders’ exit options have gotten better since the 1980s. That’s when private equity really started to take off. In a nutshell, private equity is an exit path that gives founders the opportunity to exit their business in full or in part for cash, while optionally remaining involved in the business.
Before private equity (PE) became popular, the most common exit options were:
TAKING THE COMPANY PUBLIC
Not every founder can do this because the company needs to be both large enough and sophisticated enough to navigate the process of going public, not to mention the reporting requirements after doing so. A public sale is also not necessarily an exit unless it’s set up correctly, which is a complicated matter.
SELLING TO A STRATEGIC BUYER
In this case, a strategic buyer acquires the company, so the founder may no longer be involved. This is typically where you see the most disruption to the company and its culture—and by extension, a founder’s legacy.
TRANSFERRING TO A FAMILY MEMBER
Often, this strategy doesn’t work out because the new owners may lack the necessary expertise or interest. Also, a transfer of ownership within the family is not usually a liquidity event for the founder.
SELLING TO EMPLOYEES
Employees don’t always have the cash or expertise to do this, so it may not be feasible or good for the company. It’s also sometimes difficult to sell the business to your employees for a fair value.
Unfortunately, you may have heard horror stories about PE firms terminating employees, changing the brand, and destroying the value of companies. We’ll be the first to tell you that these things do happen, but they are not the default for private equity and are not how we do business at Trivest.
As a founder, you’re in control. You get to decide which kind of firm is right for you to partner with. Partnering with the right private equity firm can be one of the best steps forward for your business.
How founders and companies benefit from private equity
As a founder, you’re likely worried about more than just getting a fair value (though that certainly is important). You also likely worry about how a sale will impact your employees and customers, in which case you may want to stay involved in some capacity. If you pick the right firm, private equity can resolve these concerns.
At Trivest we believe private equity is often the best choice for founders because it benefits founders, employees, customers, the management team, and even suppliers.
Picking a private equity firm
If you decide to sell to private equity, make sure you choose one that’s a good fit for your goals. Some important questions to ask the firms you’re considering include:
Does your firm hold funds in escrow or buy reps and warranties insurance? It’s not uncommon for a PE firm to place a portion of the sale proceeds in escrow as a hedge against unknown expenses or liabilities that crop up. This approach can create conflict that hurts the company. With insurance, on the other hand, both sides can work together to make a claim.
Do you use earnouts? Some private equity firms may negotiate an earnout, making a portion of the payout amount contingent on hitting certain targets post-close. This can be a frustrating agreement for a founder who’s no longer in control of the business.
Am I required to re-invest? Some firms want founders to invest or maintain some portion of ownership in the company. At Trivest, we invest in founder and family-owned companies. We don’t require founders to re-invest, though 90% of the founders we work with do so they can participate in future upside. The rest are usually at a point in their lives where they don’t plan to work anymore. If you get to know us, you can decide if you think we’re going to be good for your company. You get to decide whether investing is in your best interest, rather than doing it because it’s a requirement.
Keep your company growing
As a founder seeks a partial or total exit from their company, it’s important to not let the business stagnate. We believe private equity firms should leave a company in better shape than they found it. We invest in what we consider businesses with good engines, though they may have a few dents here and there. Our experience has helped us devise a playbook to “tune up” companies and get them running at peak performance.
The Trivest goal is to focus on making each business a great business. That’s how we get results for investors, companies, management teams, employees, customers, and suppliers. Our goal is simple—just build great businesses.
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