Selling Your Business to Private Equity

Private equity has been a major player in the glass and glazing industry since at least the early 2010s. At that time, large consolidated funds made aggressive moves into the industrial flat glass arena and those moves have continued until today. But now, the more fragmented nature of the local glazing contractor marketplace has become attractive to these same players because these glazing shops tend to be founder-led and without effective succession planning.  

At base a private equity transaction should be viewed with the risk attendant to most sales of a business. A key difference is, however, that the players in these markets are professionals in this process who may, or may not, have any experience in the glass industry business arena itself. As professional dealmakers, the terms and teams they bring to these transactions must be reviewed and addressed both carefully and creatively to ensure a fair and reasonable end for both sides. 

So, what are a few considerations if private equity comes knocking, whether invited or not? 

Understanding private equity ownership and stakes 

Start with the fact that it is best to think of private equity as a generic term that fits into various parts of many kinds of financial transactions. Small and mid-cap markets are finding the result of these transactions can help investors acquire ownership stakes, usually in closely held, non-publicly listed companies. And for the target entity, meaning the company to be acquired, these transactions can help resolve complex, and sometimes personal, issues surrounding an owner or leader exit. 

The reasons for taking ownership stakes vary widely and require balancing the goals of both the target and acquiring entities. Potential scenarios can include:  

• Capital growth, where the target gives up little control over operations but must repay the infused capital.  
• A turnaround, where there is investment to stabilize a potentially struggling target company, who must then give up control to reposition the business.  
• A secondary sale, involving a private equity holder’s sale of its interest to another similar fund.  

Public-private sales, with the goal of returning a publicly traded company to private hands.  

Or, if the transaction is a management buyout, current managers use debt and equity supplied by private equity to obtain ownership, while the equity fund becomes a debtor who may have a voice alongside the retained management. The opposite is possible too, with a management buy-in, where external managers use debt and equity supplied by private equity to obtain ownership and then use their skills to replace existing managers to realize growth.  

Managing risk while using private equity 

Combinations and permutations vary widely, but the crux remains managing the risk presented by the privilege of using private equity. Those risks are as varied as the transaction types, but a few key considerations do exist at points throughout a private equity transaction. 

Start with the operations of a target entity. Regulatory and compliance issues are key considerations for any business sale, but the extent of compliance can make a target entity more or less attractive to outside capital given the health and safety compliance issues attached to modern glazing work. Labor issues like misclassified contractors, wage-and-hour compliance, or entitled benefit uncertainty each have the capacity to sink a potential deal for outside investors.  

And in smaller markets, deals can fall through for simple things like abnormalities in regulatory compliance with meeting minutes, shareholder approvals, or simple business founding formalities. For those interested, getting a business’ internal operations in good order is an essential step before entering the realm of the private equity marketplace. 

Limit post-sale liability.If the due diligence phase suggests things are solid, many issues about the target entity are then addressed in the Representations and Warranties sections of a sale or contribution agreement. In these long sections of the agreement, the target makes various commitments regarding the current state of the business and representations of facts as to its good standing. Where agreed to, these representations about the target business become warranties for the purchasing or contributing party. And if those representations are later found to be inaccurate, and the warranty of that term breached, one can expect years of litigation or cost reimbursement battles with private equity.  

Limiting post-sale liability starts with the adage that an ounce of prevention is worth a pound of cure, but essential agreement terms like liability caps, termination periods, escrow and insurance for representation and warranties can each play a role. 

Care is also needed when negotiating price. Among the deal types noted above, earn outs are often used to set a final price. In these situations, the ultimate payout to the target can be expressly tied to business performance after the sale, with the price then adjusted depending on agreed to metrics. Of course, given that many times the private equity group takes full control over the business at the time of sale, their interest in meeting targets, or changes in accounting for how an individual business unit performs, are not in the control of the former shareholder/owner.  

And while we do not need to assume any bad intentions, the seller should feel more secure if the agreement includes terms addressing guaranteed minimums, third party valuations on consistent accounting methods, or performance metrics that incorporate considerations beyond the simple profit-and-loss statement.