The Advantages of Selling Your Business to a Private Equity Firm - Praesidian Capital (2024)

FAQs

What are the benefits of selling to private equity? ›

Private equity investors are strategic buyers. The deal structure likely will give the PE fund a majority ownership stake — perhaps as much as 80 percent of the company. The current owners will be expected to retain the remaining ownership stake.

If your business is struggling, the PE relationship could ensure you get far more value than you would have alone due to the PE firms' fresh outlook, ability to roll up your firm with complementary businesses, and experienced managers.

For business owners, selling to a private equity group can help mitigate personal financial risk. By diversifying personal wealth and reducing the reliance on a single business's success, owners can achieve a more secure financial future.

Private equity firms buy companies and overhaul them to earn a profit when the business is sold again. Capital for the acquisitions comes from outside investors in the private equity funds the firms establish and manage, usually supplemented by debt.

The tax advantages of private equity investing. There are two significant tax benefits that accrue to private equity investors: taxation of carried interest at the capital gains rate of 20 percent and tax deductions from interest paid on debt.

But in reality, today's private equity firms are focused on driving value through revenue growth vs. cost reduction while offering people, processes, and technology that can help owners and entrepreneurs to grow businesses, increase headcount, and generate a return for all parties involved.

Private equity investments are traditionally long-term investments with typical holding periods ranging between three and five years. Within this defined time period, the fund manager focuses on increasing the value of the portfolio company in order to sell it at a profit and distribute the proceeds to investors.

What are the cons of private equity? ›

Another con of private equity is the high fees charged by PE firms. These fees can eat into returns and make it difficult for investors to realize a profit on their investment. Additionally, private equity firms typically require a large initial investment, which may be beyond the reach of many individual investors.

According toCambridge Associates' U.S. Private Equity Index, PE had an average annual return of 14.65% in the 20 years ended December 31,2021.

"Two" means 2% of assets under management (AUM), and refers to the annual management fee charged by the hedge fund for managing assets. "Twenty" refers to the standard performance or incentive fee of 20% of profits made by the fund above a certain predefined benchmark.

Many private equity firms charge a two-and-twenty fee structure. Fund investors must therefore pay 2% per year of assets under management (AUM) plus 20% of returns generated above a certain threshold known as the hurdle rate.

There are a few rounds of negotiations between the seller and the private equity firm during the process. The entire process can take anywhere from one month to a year, depending on the investment circ*mstances.

The most significant benefit of selling shares is the ability to raise funds for the company. Furthermore, it increases the level of accountability and attracts more investors.