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I saw reference this week to a report which estimated the amount of private equity “dry powder” at a massive $1.96 trillion as at the end of last year (2022).

These are funds committed by investors but not yet spent – in other words, for businesses that are in good shape, the next year or two could be a great opportunity for those looking to exit their company, assuming it has tangible business value.

Of course, private equity is not the only way to exit your business, there are several ways, so what are your options and what do investors look for?

Let’s look first at the three main types of acquisition, especially where small-midsized, often family-owned or owner-managed businesses are concerned.

Private Equity – a common way for owners to exit their business, private equity houses will typically step in and take a large, majority stake in the business and provide an initial cash payment with the balance (generally the major part of the agreed price) contingent on various conditions over the following 3-5 years. These conditions will normally include the owner remaining in the business for this period and warranting the revenue and earnings of this business for the period in question – despite no longer having control of the business in terms of shares or board seats.

Companies acquired in this way are expected to be sold on and to see a strong gain in bottom line earnings, with cost cutting measures often put in place to ensure this, to increase the business value for resale. Many companies will also find their balance sheets loaded with debt – the acquisition costs and fees – as this increases the returns on resale by reducing the cash utilised by the private equity company. Such measures can obviously have a negative effect on company culture and morale, depending on the approach of the private equity acquirer.

Competitor or Group Acquisition – this is another common way for companies to be acquired. In some cases a competitor is looking to increase its own business through acquisition and so benefit from economies of scale and increased market share, while in others a larger group of companies is looking to either diversify its business or to bulk up a part of the group through acquiring a competitive or complementary one.

In both cases there is also typically an earn-out period expected of the owner, who is therefore bound to the business for an agreed period of time, with the earn-out based on agreed targets for revenue and/or profitability.

The acquirer in these cases is not looking for a quick flip, but rather to increase the business value of its overall holdings and reap the benefits of scale. Company culture may be affected here, too, but only where the acquiring company has a markedly different culture to that of the business being acquired.

Investment Holdings – a third way, and not as well-known as the other two, is to sell the business to an investment holdings company. This is still less common than either of the other two options, but does have a number of advantages for companies that meet the generally more strict criteria for purchase.

Firstly, there is seldom the need for the owner to remain involved in the business post-sale as one of the criteria is that the business has a proper management team that is able to continue to operate whether or not the owner is present, although they might opt to remain involved as an advisor and/or non-executive chair. It also means that there is generally no earn-out or delayed payment structure, assuming the business has an audited history of sustained earnings growth and a suitably diverse base of customers in a market that is not too narrowly focused.

Secondly, the company culture is seldom impact and, in fact, morale might even increase further as investment holdings companies generally want to widen the shareholding base of the business in order to retain the key staff. Furthermore, because the investment company is planning to retain the business for the long haul, seeking business value growth through the growth in revenue and profitability of the company, they seldom embark on the sometimes-ruinous cost-cutting that can be a feature with some other types of acquisition.

Let’s now turn to what acquirers are looking for in their acquisition targets.

Strong Management Team – no acquirer will be interested in a business where all the IP is, in effect, resident with the owner. It’s a potential single source of failure, but one that is far too prevalent in owner-managed businesses. It’s essential that, for your business to be looked at as a serious acquisition target, you have a strong management team that can, and does, run the business effectively even if you’re away.

Sustainable Revenue – although focusing on a niche is often a great idea when you’re starting out, as the business grows, you need to expand and diversify appropriately. This doesn’t mean that you do anything that will potentially earn a quick buck, but rather that you spread your risk. Too much revenue coming from one customer is a big risk to your business, as is too much from a very narrow market segment. You need to have a business that is protected from the typical cycles of a small niche or customer base.

Every business is different, of course, but try to maintain no more than 5% of your revenue from any customer and no more than a third from a narrow market niche.

Cash Flow – the old adage of a sale not being a sale until the money is in the bank holds true. Pay attention to cash flow – poor cash flow eats away at profits just from the cost of the working capital needed, not to mention the additional stress, while increasing risk significantly.

Sustainable Profitability – just as your revenue needs to be sustainable, so must your profitability. Net margins do depend on the type of business, of course, in segments with long payment cycles (project-based, for example), margins need to be a lot bigger than those from a business with short payment cycles and great cash cycle turns. So, look at return on working capital, rather than just net profit, to get an idea of this.

For example, a project-based business with a 20% net margin that turns cash only 3 times a year has the same ROWC as one with a 5% net margin that turns cash 12 times a year, and is certainly no less risky, provided it has a clear focus on margins and cash flow.

Systems and Processes – if you don’t have well-documented and comprehensive systems and processes in place, you’re simply adding to the costs and risks of the business as new staff members take longer to get up to speed, things can fall through the proverbial cracks and there will be a lack of consistency across the business. And ensure your systems and processes documentation is “living” and updated frequently with the inevitable improvements that will be found.

Of course, there will be other areas, too, depending on the business – the long-term vision and/or BHAG, the culture of accountability in the business, the ability of the business to clearly differentiate itself from its competitors, and so on, but these are often more subjective in the eyes of the acquirer.

So, ask yourself whether your business value today is where you believe it should be and, if not, why do you think it’s falling short? Are all the areas mentioned above in good shape, and would you feel confident leaving your business for a month, and knowing it would continue without a hitch while you were away?

If not, now’s a good time to start getting it in shape – even if you’re not planning an exit, using these criteria as a basis for your sound business will reap rewards in terms of growth in revenue and profitability while reducing risk and stress.


Following a career spanning >50 years in the technology industry across three continents, with three decades in CxO roles leading significant, sustained growth in revenue and profitability, I now work with successful owner-led businesses to further enhance their growth, profitability and business value.

If you’d like to discuss your business value, company culture, board, business strategy, trends, goals, or anything else related to your business, book a confidential, free 30-minute call with me here.

I’d be delighted to talk with you.


And if you’d like to learn more, these related posts might be of interest:

You might also enjoy listening to this podcast by Donald Miller, where he interviewed Michael Arrieta of Garden City Companies on “How to Sell Your Small Business for Millions.”


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