Do you want to sell your company? Here’s a potentially lucrative exit plan every company must consider.

The company you founded generates considerable profits and has grow to be a market leader, so you have decided to sell it and expect a decent return. You can wait and proceed to develop it until it reaches a higher price, but you need capital and a management team with the vision and resources to make it occur. Selling to a private equity firm while remaining committed to growth could also be the strategy you need – If you are willing to lose all the pieces to try to achieve this goal.

In business, there is at all times the possibility of losing all the pieces, but selling shares carries even higher stakes. These investors typically expect a return of seven times EBITDA (earnings before interest, taxes, depreciation and amortization) at the time of acquisition, i.e. in just three to seven years. If the bet pays off, everyone shall be blissful. If this does not occur, they could lose all the pieces. Worse yet, you probably won’t have any say in how the recent owners play their hand.

Private equity firms have grow to be more demanding and place greater importance on acquisitions, but there are at all times opportunities if your company is successful, has room to grow and shows that it may possibly realize its potential. They are looking for corporations from industries with a proven recurring revenue model. That’s exactly what equity firm Blackstone noticed when it decided to acquire a majority stake in Spanx from founder Sara Blakely in 2021.

After transforming the shapewear industry in the early 2000s, Spanx found stagnation during the pandemic and in the face of accelerating competition. Blakely also wanted to develop more products and expand sales channels, but she needed partners who could help her. The deal she struck with Blackstone valued the company at $1.2 billion and put her personal fortune back in the billions. Blakely stays a “significant” shareholder in the company.

Making the perfect equity match

Spanx may have lost some of its luster before the deal, but its fundamentals must have been strong or Blackstone would have done nothing greater than give it a second glance. Most private equity groups look primarily at profitability, typically having an EBITDA of at least $1 million. But in addition they want a well-organized leadership team. After all, a private equity group is really just a group of investors with a lot of cash and other financial resources. They don’t have staff to come in and help run the business. So they need people in the industry who will proceed to run it even if the owner leaves or steps aside. They may open some doors, but it’s up to the original team to walk through them and make the plan work.

You must also make sure everyone has the same expectations about why they are attracting investors, what results they want to achieve and how they are going to achieve them. An absence of clarity can lead to unhappy endings.

One regional consulting firm I worked with had grown significantly and the owner wanted to go national but felt he had gone so far as he could. He brought in a really famous private equity firm that bought most of the company. He and his partner planned for one of them to retire and the other to stay with the company and manage it. However, it was not clear what indicators were supposed to ensure success at the next stage of exit, and what’s worse, they weren’t consistent with the strategy of the capital company. The company went bankrupt in just a few years. Both partners lost their equity and some of the money they were owed from the transaction.

The lesson here is: you need to be clear on all issues. Follow these steps to get the clarity you need:

Understand what capital investments can and cannot do

Many business owners have the misconception that this is the neatest thing in every situation – that it’ll bring them the most profits and ensure the best growth. This may not work in your specific case.

Clearly define your strategy for selling to a capital company

Do you want to exit completely and sell 100% to investors, or stay in the market to get a “second bite at the apple” and earn a higher rate of return after the group develops your company?

Interview other entrepreneurs who have worked with this private equity firm

Most private equity groups have a complete list of all the corporations they have invested in and purchased. You’re partnering with these people, so you want to vet them, identical to you would when hiring any other partner in your company.

• Talk to the founders of those corporations and ask how well the investors executed their strategy. Did they have results? What was the process like?
• Ask about the company’s cultural transformation. How did the founder feel going from being at the top to being more of an worker or manager? Was it a good culture overall? Were the employees blissful to stay?
• Find an external advisor.

Private equity is a small specialty in the financial sector and doesn’t do many deals, so news like the Spanx deal attracts a lot of attention. Capital investment is also widely discussed in informal (and often uninformed) word of mouth; other business owners will sometimes make decisions based on this. An expert advisor can provide you with the right information to help you make the right decision. Choosing the private equity option could be a lucrative exit plan for your company, so it’s price considering.

Start with the exit in mind

Before you do this, have a complete exit plan and succession strategy in place that defines what the end looks like and how best to get there. Consider not only the valuation you want, but also look at how you want the transition to work – from details equivalent to how you want to ensure employees are cared for, to broader goals equivalent to the legacy you will leave behind. Sit down and really think about your exit strategy.

Exhaust all development opportunities before you bring in outsiders and they are more likely to seek you out.