Collaborating With Your Private Equity Partner on the Next Exit

When you are just starting the process of selling your business, you’re probably not thinking too much about the next exit. But when selling to a financial buyer like a private equity firm – or when vetting potential growth or minority investors – it’s wise to take this into consideration and have a thorough understanding of what this second exit will look like, even before the original transaction closes. We’ll use investor, private equity firm, and capital partner interchangeably throughout this blog.

While it may feel like putting the cart before the horse to discuss an investor’s exit even before they’ve invested in your company, discussing their timeline and plans allows you to ensure alignment with your expectations. When we invest in companies, for example, we share our timeline for the eventual second exit even before a Letter of Intent is signed, often during the buyer visit (or management presentation) stage of a transaction. We ask owners and management teams what their expectations are and what their goals would be for that next exit, and work together to include that in the overall vision for the partnership.

For us, the timing and process for the second exit is collaborative. We never push for an exit from our investment at the expense of the long-term health of the company. Instead, we are in regular dialogue with our management partners at each company as to when would be the best time for the exit process to take place. As with most areas of a transaction, we’re looking for win-win-win solutions that benefit all of our stakeholders, including our management teams and investors.

Ongoing Preparation

Typically, there will be set goals that trigger the second exit process. With our partner companies, we set these early on in an investment and set aside a bit of time at each quarterly board meeting to measure progress against them. Even though the date is a moving target, having a general idea of timeline helps to proactively evaluate and solve for areas of risk in the business.

These may have been identified during the due diligence phase of the investment transaction, or could arise as the partnership progresses. These tend to be longer-term items, such as a higher customer concentration that requires a business development plan to win new customers. Or, there could be a keyman risk or succession gap, leading to one or more recruitment processes.

Another ongoing area of focus should be data. Together, you and your capital partner can assess the quality and availability of data about your company. What other data points should you be tracking (not just for exit purposes, but to help improve the business)? What holes exist in the data (these could have been identified in the due diligence phase of the initial transaction)? Is your data easily accessible? Is it workable? Getting your data in order is a great long-term step before any transaction, so lean on your private equity firm to help with this step.

Exit Phase

Once the exit goals are in sight, more rigorous preparation can begin. A good capital partner will lead much of this preparation to alleviate the burden from business owners, including evaluating the exit and M&A environment. About six to nine months prior to the target exit date, you will likely engage an investment bank to lead the process. Your private equity partner should lead this process, compiling an initial list of banks to interview. As with the long-term preparation, choosing the investment banker should be collaborative. You should have a large say in which group is going to represent your company.

Before the sale process is launched, there will be a period of intense organization involving you, your team, your private equity firm, and the investment bank’s team. This will look very similar to the previous transaction, and includes organizing your company’s data, articulating the company’s growth story, and testing your processes and systems. Your private equity firm should be leading this stage, though you and some members of your team (specifically your CFO or Controller) will still be actively involved.

This is also a good time for you to reflect on your previous transaction. Think about what questions your capital partner asked you during the due diligence phase that you didn’t have a great handle on. What roadblocks or delays occurred in that transaction and why? Your private equity firm should be able to help identify these areas, but as with the previous transaction, you know your business best and will be the main voice for the company. Use the answers to these questions to better prepare yourself for the new process.

The Final Countdown

Unsurprisingly given the theme of this blog, we believe choosing the buyer should be a collaborative process. We work to ensure that our partners are not only okay with the buyer chosen, but actually excited to work with them going forward. That’s why we tend to step more into the background once discussions with potential buyers (such as buyer visits) begin. We want our partners to establish trust and comfort with the buyers themselves, and confirm if there is a good two-way fit. As with the previous transaction, you’ll be the one answering questions or offering explanations during the diligence phase.

Once an LOI is signed, a good private equity firm will step back into the lead role, leading negotiations and legal documentation. As you may remember from the previous transaction, this can take a significant amount of time and effort; you may find it refreshing to be able to focus mostly on running the business this time.