These founders sold to PE. The pros and cons

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What to do if a private equity firm comes knocking to buy your business?

Selling a business is an enormous decision for many owners and it often involves a lot of moving parts. The instinct might be to look to a strategic buyer in the same sector, or it might be a private equity firm, as global private equity is sitting on nearly US$4 trillion in dry powder.

Selling to private equity requires understanding what this kind of deal entails in order to avoid regrets.

This founder was happy with his decision to sell to PE.

“It was life-changing money,” says Neil Wainwright, the co-founder and former chief executive officer at Nexonia in Toronto, an expense management platform company. He sold to a private equity firm in 2015 after they had approached him with an offer.

When it comes to his advice, it’s two-fold: Have a magic number in mind in terms of what you, as the owner, want to financially receive to be satisfied with the deal; and be willing to give up something you have built, “because it’s no longer your baby”.

Deals with private equity firms can go a number of different ways. In Wainwright’s case, the PE firm didn’t want him to stick around after the deal was complete, so once the sale went through, he walked away from his company.

How much involvement, if any, the owner has after the sale depends on how the deal is structured, which is one reason it is necessary for owners to pause before jumping into anything, says Brett Miller, a partner and business advisor at Montreal-based Richter family office and business advisory.

“It is akin to selling a house – you typically want to spend time preparing the business for sale, have all required materials ready and package up the opportunity to look as attractive as possible, approach multiple suitors, build competitive tension, and solicit multiple offers,” says Miller.

The owner then has the option to work with the offer that meets their criteria, he adds.

The problem with working with one buyer

“[The] problem with working with one buyer from the beginning is they will require lots of information you may not be ready to provide, aren’t competing with anyone on price, may not be able to properly articulate growth prospects for the business and ultimately may be leaving value on the table as a result.”

He adds, “While these deals can work out, we don’t think this is a path to maximize value or certainty of closing for business owners,” says Miller. “We typically advise clients that are solicited by buyers to pause, think about their personal and corporate goals, and if selling makes sense from that standpoint, to run a sales process with an advisor.”

Deals with PE tend to happen faster than with strategic buyers, which can be good on one hand, but can also bring the potential for items to be overlooked in these deals. It’s essential that sellers understand both the role they may or may not have following the close, as well as the deal’s purchase price structure, especially if there are earnouts involved.

“Furthermore, the presence of a non-compete agreement may restrict future entrepreneurial pursuits,” says Miller. “Other considerations include the retention of the company name, the treatment and incentivization of employees, and the broader cultural impact on relationships with suppliers and customers.”

It also makes sense that PE firms would not necessarily come in with the highest valuations, as, ultimately, their goal is making money for their shareholders and generally aim to run companies more efficiently, having less of a vested interest in absorbing the company within its own business than a strategic buyer would.

This is why Wainwright says it is important for business owners to have a magic number in mind.

“When you start to get interest [from PE firms], when you hit these revenue thresholds and people start calling and wondering if they can buy you, make sure you know what you personally want as your minimum number,” he says. “Then, when someone comes along and can write that cheque above your minimum number, you’re like, ‘Okay, this could be very interesting.’”

Selling to PE: rolling equity

Selling outright to a PE firm is only one way to make a deal. Joel Lessem, who co-founded Firmex in Toronto, a virtual data-sharing platform in 2006, sold to PE firm Novacap in 2016.

“We had one founder that had already left the business. Then we had angel investors. It was time for some liquidity. We’d already paid out one dividend, but it was time,” says Lessem, adding that he and his co-founders knew the approximate valuation for the company because they had almost sold to another firm the year before.

Novacap bought the majority of the business, including most of the founder and angel investors’ stock. Lessem rolled half his liquidity, giving him a minority position.

“I really did not know what to expect,” he says. “There are mixed reviews on private equity firm entrepreneurs. I just thought, ‘Well, I took a chunk of money off the table. If I lose my job in six months, I have plenty of cash to fall back on and figure things out from there.’”

Lessem remained as CEO after the deal with Novacap was completed, then sold the company again to a second PE buyer in 2019, Vertu Capital, continuing as CEO. Then he sold the company a third time in 2021 to a PE-backed corporation called Datasite, remaining as an operating advisor to Vertu Capital and an LP in all the acquirers. The management team remains in place at Firmex and the company continues to prosper as a division of a larger business owned by European investment firm CapVest. He now runs Lessem Investments.

But he warns that his experience may not be for every owner.

“If the CEO is not analytical, process and data driven then they could struggle with PE owners,” says Lessem.

In fact, when Elke Rubach, wealth advisor and owner of Toronto-based Rubach Wealth, hears from clients that they want to sell to PE she says her first question is always: Why?

The reasons can range from capital needs to personal reasons.

“My job is not to tell people what to do. Instead, I’m like a financial therapist,” says Rubach. “I hear, ‘I’m tired. I can’t grow further. I don’t want to risk more assets to grow, but I see the potential.’”

While these are all valid reasons, Rubach says there is potential in these situations to move too quickly and not take the time to deal with the fine print and get the right experts on board.

“Every reason is valid as long as it’s duly explored and not reactive or impulsive, or from tunnel vision. When it’s your baby there’s a lot of emotion and there are things you don’t see.”

And founders are great at building businesses but not necessarily good at selling that business. Especially if it is their first round of selling to private equity. 

“As a business owner, you don’t want to surround yourself with the yay-sayers because then they’ll be like, ‘Oh, look at the cliff. How cute the cliff.’”

She adds, then the business owner starts to think, “‘I’m going to jump down the cliff. Yes, it’ll be a great fall,’” says Rubach.

“No, you want people who are like, ‘No, you idiot. You’re going to kill yourself. Don’t do that.’”

And then there is the question of what happens after the sale.

Is the founder going to stay on? If they do, it could be some of the worst years of their life,” says Rubach. Or it could be a great experience. Or, they could be fired. And whether that scenario, or simply walking away after the deal, “Are they ready to let go?” she asks. 

Ultimately, surrounding themselves with experts, those who have been there, and those who can give them an objective view before a sale, is with the aim of “Let’s do it right, not fast.”

After the sale

“I am very much a [believer that there are] 168-hours in the week, and I work all of them on my business, so 7×24. Going from that to zero involvement in the business was an interesting transition. My wife’s response was, ‘Great. You’re going to the gym tomorrow.’ Without the stress of running a business and with the time to be in the gym, I lost 30 pounds in six months.”

Wainwright echoes the need for good advisors before and after the sale, when founders will likely be in possession of newfound wealth.

“I’m the ‘have a person’ kind of person,” says Wainwright. “When I got all the money in, I parked it with someone I trusted. The only thing that I did in advance, which was really good, is I set up all the trusts and all the stuff that you normally do. I had done it well in advance of the deal closing.”

But he did have some fun with his “life changing money.” Wainwright and his wife bought each other a Porsche and he purchased season tickets to his beloved Toronto Maple Leafs hockey games.

While he enjoyed a bit of downtime after the sale, it didn’t last long and Wainwright has already founded another company – UpHabit – because, he says, that’s what keeps him going.

“I could have chilled out,” says Wainwright, “but I’ve decided that my goal is to work till I’m 84 and die when I’m 85.”

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