Thinking about selling your business? Here’s what to know about private equity deals
Such deals have soared in recent years, and small-business owners are often getting solicitations.
The average age of an American small-business owner is 55, according to the U.S. Small Business Administration. Many of my clients of that generation are already starting to think of cashing out, by either fully retiring or transitioning over time to new ownership.
One popular option is to sell a business to a private equity firm.
A private equity firm buys part or all of an existing business, which in many cases provides a cash buyout for the existing business owner, who may or may not decide to stay involved. Private equity deals have soared in recent years, with deal volume exceeding $838 billion in 2024, a 19.3% increase over the prior year. Assets owned by private equity funds have reached the highest level since 2020 and the industry is expected to grow by almost 10% over the next decade.
Some think these firms buy and carve up companies as if they were Gordon Gecko from the film Wall Street. But that’s not often the case.
“We’re really creating the value for our investors by helping to fund the growth of these companies,” said David Reuter, a partner at Center City-based private equity firm LLR Partners. “We’re not doing the things you see in the movies, like firing lots of people or cutting lots of costs.”
Reuter’s firm targets companies with revenues between $10 million and $200 million, with some having as few as 50 employees.
Jeff Collins, a partner at Conshohocken-based asset management firm Cloverlay, targets similar acquisitions but also looks for “overlooked assets” that are not typically of interest to institutional firms and Wall Street investors.
Reuter and Collins both said a private equity deal doesn’t necessarily require the business owner to exit. For some, it can be a path for retirement but for others it’s a way to bring in growth capital and another experienced voice to the table.
“Private equity involvement varies depending on the seller’s goals,” said Collins. “We take a business and together with the owners help to make it better. We try to be as noninvasive as possible, yet we are vocal and have an opinion.”
Reuter said his firm often prefers deals where the owner of the company doesn’t want to retire.
“The best private equity deals are marriages,” he said. “We’re providing a lot of tangible help to our companies to help them accomplish their goals and dreams.”
These firms play the role of both financier and adviser. For example, LLR Partners provides hands-on operational support.
“We’ve got … about 30 in-house people that are what I’ll call operators. They help coach and train and develop our leadership teams,” Reuter said.
Both investors said business owners must have the right attitude when bringing in an equity partner because in most cases it can be a long-term, close relationship.
“For a deal to be successful, both parties need to establish very clear expectations from the beginning [with] a very concise definition of roles,” Collins said. “It’s also incredibly important that everyone wins proportionately and everyone loses proportionately.”
Existing employees and partners — particularly if those partners are family members — should also be involved. Difficult conversations may be necessary at the front end of a transaction to ensure the parties are not wasting their time, Collins warned.
Put more simply, he said, “My economic outcome cannot be impacted by your relationship with your sibling.”
Deal structures vary: Payments can include equity or bank debt, and may go to founders, prior investors, or the business itself. Deals can be for full control or a minority investment. Both Reuter and Collins said flexibility is key and valuation is subjective and highly dependent on context.
“Most entrepreneurs I talk to have very extreme valuation expectations and often get a reality check when we get involved,” Reuter said.
As the industry has grown, many of my clients have been receiving solicitations from private equity firms. I’ve also received a few by email for my own firm. Industry experts say to be careful and to choose a private equity investor with experience and a good track record in the industry they’re targeting.
“Founders should consider multiple firms and not just jump at the first offer,” said Collins. “They should also consider using an investment banker, attorney, or trusted financial expert as an adviser so that they understand the breadth of options in front of them.”
Reuter also recommends doing research before entering into such a relationship. For him, partnering with a firm that has “deep domain knowledge” is incredibly valuable.
“You need to ask if the private equity firm has invested in other companies like yours and talk to those people and see how it was,” he said.
According to Collins, a private equity investment can turn a $10 million company into a $40 million company with the right strategy and partners. Or it could be a great way for an owner to exit their business.
“Some want to monetize their hard work and go to the beach,” he said. “And there’s nothing wrong that.”