We recently read a fantastic post on the Altair Advisers‘ blog, “Words on Wealth,” by Jason M. Laurie, Managing Director and Chief Investment Officer. The post addresses five things that founders wish someone had told them before selling their businesses to private equity firms. We thank Jason for allowing us to share the post with our readers. Read the original post on “Words on Wealth.” 

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It sounds at first blush like a business founder’s dream.

After investing much sweat and equity into your firm over the years, you decide to sell and are bowled over by the interest from would-be buyers from private equity. They will pay top dollar, inject major capital, and mostly let you keep running the business – with significant additional rewards based on the business meeting certain financial goals. They will even aid you with strategy.

As a business owner looking to retire, your options are limited. You can transition the business to family or employees or just sell. If you elect to sell, or are forced to, you are likely to be courted by private equity firms, who have emerged as frequent buyers of private businesses. Why? They have a lot of money to invest and they do not get paid until they invest their capital, which helps explain their eagerness.

Even the timing of a sale seems propitious. The mergers and acquisitions market is reviving after years of dormancy caused by higher interest rates, uncertainty and, recently, tariffs. Dealmaking is predicted to flourish in 2026 – Goldman Sachs foresees a record $3.9 trillion in global M&A. Many public deals reportedly are pricing well above market value.

Surely that spells good news for you: A private equity firm is going to make you an offer you can’t refuse.

Wait!

By no means are we equating private equity firms with Don Vito Corleone. With your help, these experienced dealmakers and business operators can likely make your business thrive as never before. But our conversations with clients who sold or considered selling their businesses to private equity strongly suggest you approach the transaction with eyes wide open before taking this route to exit your business.

Here are five things that founders wish someone had told them before selling their businesses to private equity firms.

1: Sell five years before you want to call it quits.

Call it a slow-motion exit: You need to sell five years before you want to leave, because of the way the system works.

A sale to private equity is virtually always structured nowadays such that when a PE firm buys your business you get to keep 70% of the cash proceeds but are mandated to roll the other 30% into the new business entity. This means you keep running the business, backed by their injection of capital and strategic guidance. And when they sell the business in five to seven years, you can potentially make more money on the 30% you rolled in than on the original 70%, thanks to your hard work and their expertise and profit focus. This is the allure of a “second bite of the apple” – pocketing cash from the first sale while benefiting from a second, potentially more profitable event down the road.

It may be a great deal-sweetener, but it hardly spells a cushy glide path to your retirement. Business founders have told us that they worked harder than ever in such scenarios because they had an interest in the outcome. They wanted to make the business perform well so it would sell, but they neglected their personal timelines. Their jobs got tougher in the final years, not easier.

Bottom line: You have to engage the PE firm years in advance and get ready for that lengthy farewell. Otherwise you may not only be failing to maximize the value of your business because you waited too long – you could be compromising your own personal value and timeline.

2: This is not a DIY project.

At their core, private equity firms are deal folks. They have well-oiled “deal teams” to assist them with structuring and financing deals. You, too, need a team. In fact, you need two: one to assist with the business and one to assist on the personal side.

Your business team should consist of an attorney, accountant and financial professionals specializing in mergers and acquisitions. The misconception on the business side is that there are so many interested buyers that there is no need to spend fees on a full deal team. You need professionals to represent you. These transactions can fall apart quickly and often do not play out as intended.

For your personal team, you want an estate attorney, an accountant and a wealth adviser. The misconception here is to wait to engage a team until after the business sale. There are many planning opportunities that need to be done prior to – sometimes years before – a sale. A common refrain among professionals who assist business owners with their personal matters: “I wish they had come to me sooner.”

A lesson learned from our clients is to create deal teams with professionals who collaborate versus staying in their silos.

3: Leave the last nickel on the table.

Do not go for the highest sale price you can get. Prioritize finding a good partner instead.

You are not just cashing a check when you sell; you are creating a partnership. You will have to work with these professionals for five to seven years, assuming all goes according to plan. That nickel you left on the table in the first deal could turn to dollars in the second with the right collaboration. A cohesive partnership should increase the value over time.

Another reason to leave the last nickel on the table is because sometimes it is not real anyway. In addition to cash and rollover equity into the new business, private equity transactions usually include a third component: earnout payments. The PE firm agrees to pay you additional payments after the sale closes, contingent on pre-agreed financial metrics.

Earnouts “sweeten” your deal and allow the PE firm to bridge the gap between what they want to pay for your business and your desired price. The rub is that in our experience, the metrics and timeframes often seem to be just out of reach and are the source of many post-transaction conflicts. If the price does not make sense without the earnout payments, then the transaction does not make sense. PE loves the deal.

Not least important, consider whether you will enjoy working with them. Do you see eye-to-eye on values? Try not to let the size of that first 70% cloud your view, like the founder who said “I have a ‘no jerks’ rule – but I broke it when it came to private equity.”

4: Be prepared to be a live commentator.

One of the big frustrations of founders when they sell to private equity is having to spend a lot of time giving a play-by-play account of their business to the PE firm. You will have to “Tell it like it is” – like the legendarily verbose sportscaster Howard Cosell – over and over and over again. The PE partners will be listening closely and asking a lot of questions. You have to put together PowerPoint decks, go on conference calls, connect seemingly constantly. Founders dramatically underestimate the amount of time they will need to spend communicating about how the businesses are operating. One of my clients recently quipped, “I now spend too much time talking about talking about the business versus running the business.”

5: They can tell you to leave whenever they like.

Good news: A PE firm will be proactive about bringing in new, experienced executives as needed to accelerate growth. Bad news: One of them may replace you before you are ready.

You will have to confront this loss of control when you pair up with private equity. The PE firm may aggressively cut costs by laying off employees as well as changing company culture and eliminating perks. Their short-term focus can produce short-term gains but at the expense of long-term sustainability and business relationships – including the one with you.

At Altair, we have been along for the ride with our clients through many PE transactions that worked out well for them as well as some that did not. There is no magic piece of advice to guarantee a successful transaction. But learning from the experiences of others goes a long way to help you prepare for your own transaction.

 

About Jason Laurie Jason Laurie is a founding partner, managing director and Chief Investment Officer (CIO) of Altair Advisers.  As CIO, he serves as the chair of Altair’s Investment Committee and is responsible for leading the strategic direction of the firm’s investment advice in collaboration with Altair’s Research Team. Jason also serves as the lead consultant on numerous client engagements. Jason is a CFA charterholder and a CERTIFIED FINANCIAL PLANNER™ certificant. He is a member of the CFA Society of Chicago. Jason graduated cum laude from the University of Notre Dame, with a BBA degree in finance and concentration in computer applications. Beyond his leadership at Altair, Jason is a dedicated supporter of Chicago’s fine arts. He’s a member of the Art Institute of Chicago’s Business Council and leads Altair’s corporate sponsorship of the Chicago Symphony Orchestra. In addition, he is a member of the Economic Club of Chicago. >> Learn More About Jason

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