What Happens When Private Equity Buys Your Company? with Peter Harris

today we're going to talk about what it's like to be acquired by a private Equity Firm now maybe you work for a company that is in the process of being Acquired and you don't know what to expect or maybe you're an owner of a company and you're wondering if private Equity might be the right option for you either way there's a lot of really good questions here that you should know the answers to and so that's what we're going to talk about today in our video and stay to the end because at the end I'm going to give you another alternative that I think in some cases is a vastly better option than going with private Equity all right so first we got to understand what is private Equity now in this case I'm assuming that you're either working for or you own a business that is either being acquired or that you're looking to sell to a private Equity Fund so this isn't the same as like venture capital or hedge funds or other things right you have a good business or you're part of a good business that's generating good profits and you are looking to sell the whole thing or the vast majority of it to a private Equity Fund in that case you're probably working with a leverage buyout fund a leveraged buyout fund is a private Equity Firm that uses leverage it uses debt to acquire the businesses that it invests in so for example let's say that I have a company that's generating I don't know 20 million dollars of cash flow every year right and maybe the business is not growing super fast maybe it's not growing at all but it's not shrinking either and the cash flows are really stable that makes it a perfect investment for private equity and the reason for that is the leverage so when a private Equity Fund comes in and they buy the company they're going to use debt as part of that acquisition it could be somewhere between 60 to 40 percent of the overall value of the business so let's say I have a business that's generating 20 million dollars in cash flow if I sell it to a private Equity Firm for 10 times cash flow which you know it could depending on the industry could be a very fair price then that's a 200 million dollar transaction if I'm on the owner that could be a great day because I could put 200 million dollars in my pocket it go buy that vacation home down in the Caribbean and retire right if you're an employee at a company you might be really nervous right because you're going to get a brand new owner and you know there's a little bit of the devil you know and the double you don't there which if your owner could be a really great day now what does that mean though the private Equity Firm buys it for 200 million dollars they're not gonna Fork out 200 million dollars of their own cash like I said they're going to use debt so that debt could be upwards of 40 to 60 percent of the overall 200 million dollars that means they're borrowing somewhere between 80 and 120 million dollars to acquire that business now somebody's got to pay that back and it's not going to be the private Equity Firm it's going to be the business that they bought they're going to use the 20 million dollars of profits that that business is generating they're going to use that money to pay off the debt over time that could be good and bad for businesses that haven't had any debt before though it can puts a little bit of strain on the business and you read in the news all the time about private Equity firms that came in they saddled a business with way too much debt and then the business ended up not being able to pay the debt and service the debt and they ended up having to file bankruptcy and lots of people lost their jobs so good examples of that would be like Toys R Us it was acquired by Bain Capital Toys R Us went through some tough times uh ultimately couldn't pay the debt lots of people lost their jobs the lawsuit's kind of a big mess that said situations like that are more the exception not the rule ninety percent of the time 99 of the time probably private Equity Funds are generating very good Returns on their Investments which means that the company is able to service the debt uh and then oftentimes they're able to improve the actual operations of the business now there are a few other ways that private Equity investors make money on their deals for example they could be focused on improving the Top Line growth of the business they you know maybe you have a business that hasn't been growing very much and they say hey we can help this business grow even faster we're going to bring them into new markets we're going to launch new products you know we're going to provide we're going to bring some Innovation and creativity to really help this business start growing again and if you're an employee there that could be great right there could be all kinds of new opportunities to grow with a private Equity Firm another way that they they could do is they could say hey the business is doing fine in terms of top line revenue but there is a lot of fat that we need to cut out right so maybe there are facilities that are not operating at full capacity maybe they shut those down and consolidate operations maybe they take operations and they move those overseas because they can reduce their costs on that side maybe they cut some of the benefits or they reduce salaries and they move headquarters from a high cost area to low-cost area there could be a lot of different things that private Equity Funds do in order to improve the amount of cash or profits that a business is generating and that's because as the cash increases it gives them the ability to pay down that debt even faster and for them it helps them generate a really good return on their investment so if you're an employee it could be good if the private Equity Fund is coming in and saying hey let's grow top line revenue or it might be a little bit scary if they're coming in saying hey we're going to cut costs across the board another way that private Equity Funds will make money is they'll you they'll buy one company and then they'll buy other companies and bolt them on and they'll do that as a way to cut costs and to increase the overall size of the business because as a business gets bigger and bigger theoretically it should also become more stable and as it becomes more stable it could be worth more ultimately though if you're in if you're working for a company that's being acquired by a private Equity Fund you should be aware that these different changes are happening it could be that you know some of the nice perks that you had are going away but it also could mean that the private Equity Fund is going to provide more stability to the business they're going to hold the company more accountable including the senior leadership which might be important to you hopefully if there are good private Equity Fund they're also providing some really good oversight and governance to really help the company perform better and in many cases private Equity Funds will come in and they'll create all kinds of interesting option plans and Equity sharing agreements with employees and so it can actually be a definite benefit for current employees that are there especially if they're working hard and doing a great job so as you can tell like there are some definite downsides and some risks to private equity and selling to a private Equity Fund there can be some really good things if you're an owner of a business right and you're in the driver's seat of deciding whether or not to sell to private Equity it can make a lot of sense right because you can get a big Paycheck cash out of the business and go buy that retirement home but you may still can be concerned about your employees that you're leaving behind sometimes private Equity investors will make you roll over some of your Equity so you don't get all of it at once and they may require you to keep operating the business for a few years will they transition you out so there are a lot of pros and cons and that's why I wanted to talk just a minute about something that most owners aren't as familiar with and that is debt if you're a business owner you're probably familiar with going to a bank and getting debt but there are a lot of funds out out there that are private debt funds and they operate similarly to private Equity the big difference is is that they will provide debt primarily and oftentimes they'll provide a little bit of equity but mostly it's debt into the business and so for example if you have managers that want to buy the business you could partner with a private debt fund where the private debt fund would provide the debt to your managers your the the people that are kind of running day-to-day operations so that they can then buy the business from you and in that case those managers become like the private Equity Fund you as a the owner get some get a really nice payday while still ensuring that your employees are taken care of these private debt funds can be a really great alternative to private equity and definitely worth your time exploring if you liked this video and it was helpful to you check out one of my other videos where we talk about what it's like to work in private equity foreign