Before jumping right into the financial details on what PE firms do post closing, there are lots of personal, intangible, and strategic things someone should think about before looking at a private equity firm recapitalization.
- If legacy and culture are important to you, private equity is worth exploring.
- If your team’s important to you and you want to give them a shot at making life-changing money, private equity’s interesting.
- If long-term financial planning is important to you — and I encourage people to talk to their wealth advisors about this because there are lots of really sophisticated techniques — private equity’s interesting.
You might ultimately choose a different path, but you should at least consult with several of your advisors— your accountant, lawyer, a lawyer who does M&A, and a wealth manager, etc. OR GEXP Collaborative if you want to centralize your team and plan. Talking to those people about what private equity’s like and if it’s a good fit for you and assuming you have over 2 million of EBITDA, there is a private equity firm out there for you. You just have to find them.
These are all points to keep in mind before you decide to go down the private equity route. They have a reason for buying your company and if you know the motives, and the things they will need to do post closing, you will have a better understanding why they are doing the things they are doing.
They ultimately have to increase the value of your business (good for you and good for them) so you have to be ready to do what it takes to pull these three levers.
How does private equity recapitalization work?
Investing with a private equity firm could allow a business owner to retain a certain percentage of ownership while receiving a large portion of the value of the company when the deal is signed. They’re able to do this by using a levered recap with which to further grow the business, thereby giving more cash to both the owner and the PE firm. Lenders are just looking to get their money back from a business, but if a PE firm only gets what they put back in, that’s a nightmare for them.
A strategic buyer might pay more up front, and there are situations where that works best for you — particularly if you’re not concerned with the legacy your business has. In that case, chase the bigger number to get out today. But if you want to hand over your company to someone who will look after it like you do and who has the same vision as you do for its future, you should consider partnering with a firm that will help you grow the business to help benefit everyone, from the owner to the families of the workers there to the community at large who utilize your company.
There are only a few levers you can pull for everyone to hit their goals: you can grow the company, grow the multiple or pay down debt. There are a multitude of ways of getting this done, so there’s a lot of flexibility in how you increase your value. Here are some ways to get that done:
Increasing the Value of Your Business Post Private Equity Recapitalization:
Grow the business
If you have 5 million of EBITDA at a 5 times multiple and grow the company to 6 million of EBITDA at the same multiple, you’ve made $5 million in value. So how do you do that? Bringing in people to fill key roles increases value, so perhaps you need to hire a sales manager to bring on and train really good sales people who can then help with customer diversity. Perhaps you’ll choose another route like re-branding to avoid negative goodwill or even develop a new product. There are a ton of ways to grow your business which will give you a better number from a deal.
Grow the multiple
So this is the same formula as above, just inverted: instead of growing your EBITDA, you grow your multiple from 5 to 6 times, which still gives you your 5 million dollar increase. Not too shabby! But how do you do that? Essentially, you need to de-risk your company. You can approach this very similarly to growing as well — avoiding customer concentration, having a transferable sales team and having good operating systems in place all help you get a better multiple.
Pay down debt
EBITDA less capex is essentially cash flow that can be used to service debt. PE firms are looking for companies that can pay off half the loan in a five-year period. So if you can arrange your financials to service the debt, you become a far more valuable and desirable acquisition or investment.
So pull all three levers. Increase EBITDA, increase your multiple by 1 and pay down half your debt over the first five years just by focusing on growth. Knowing these pretty simple concepts, how will you get a better valuation for your business?
If you want to get a benchmark on where you are today, check out the The Value Builder System and get your Value Builder Score. to see what you could do today to increase the value of your business… while you own it!