Private Equity: Not a Black Sheep Buyer

Eva Davis, chair of Winston & Strawn’s West Coast private equity practice, authored the Daily Journal article titled “Private Equity: Not a Black Sheep Buyer,” published December 2, 2014.

Private equity firms have received plenty of criticism. Why would a business entrepreneur ever consider a sale to a money-chasing private equity fund rather than another strategic business? This article describes the circumstances under which a private equity fund can be the best buyer of a business, which is not necessarily to secure the highest price today. The article also outlines key due diligence items that should be taken into account. For example, the ongoing management team must share the same vision for the future growth of the business with the chosen private equity fund buyer.

Selling a business to a private equity fund provides the current owners with cash today while allowing some or all of those same owners to retain a meaningful ownership stake, positioning them to enjoy an even bigger second bite. Sellers and management teams should understand that these funds are first and foremost financial investors that make their decisions based on their projected returns on invested dollars, and a partnership with a private equity fund will be driven by those principles. With private equity as a partner, a business and its management can meet operational challenges, navigate future growth, scale the business, and obtain a broad perspective on how to position a company for a strategic sale in the future at an even higher valuation. Ultimately, the benefit to the owners who stay partially invested and to any new member of management who chooses to invest is an opportunity to maximize profits for all of the business owners — old and new.