Buyers must understand that each seller and the company they operate is unique. Success, then, is predicated in part on the buyer's ability to negotiate with individual sellers. Shankar Kiru, managing director of Stellex Capital Management, says most private owners who are selling their business want to know that it's going to be taken care of and that they'll have a meaningful role to play going forward.
"And it's not going to be an overbearing private equity firm that comes in and says, Look, this is a new day, this is how we do business and everything you've done in the past you have to change," Kiru said at the Detroit Smart Business Dealmakers Conference. "So, we have to be very sensitive."
Further, private equity firms are entering the deal with an exit in mind, very likely on a much shorter timeline than the seller who has been building their business over decades would like to go through, or put their employees through, again.
"So, there is a balancing act," he says. "There is no one formula. But certainly, we have to walk that path very carefully."
However, with a growing tsunami of business owners nearing retirement, meaning an exodus of people who know their businesses best, financial buyers are wondering how long they are going to continue to stay in the business, and the kind of retention programs and training they have to establish the next leadership team.
"We are not doing exit interviews anymore. We are doing stay interviews in most of our companies, even within Stellex," he says. "So, how do we keep those employees motivated and engaged?"
There's also a tendency for sellers to think private equity is walking in with a post-sale playbook — that they are set in their ways. Sellers tend to ask about case studies and what they've done in the past. But he says that's not reflective of what this company is going to be like.
"Every situation is unique, and every individual is special," he says. "So, how do you really create that bond? How do you really make it seem like this is a true partnership?"
However, there are many responsibilities that fall on an owner ahead of a sale. He says they've been frustrated as a buyer trying to go through a process with those who are not prepared.
"We've got an army of consultants in every area — legal, environmental, financial, accounting, assets and real estate — and the seller is just absolutely not ready," he says. "We would rather they take the time, go through the process, get a data room all set up and be able to talk to us. And they feel like well, if I deal with one person, it's going to be easier than going through a managed sale process. No, I think you're dealing with one person or a managed sale process, putting in the foundational work is the same. So, I totally recommend any seller contemplating to do all the work upfront."
Kiru says both in terms of companies that they're looking at as well as companies that they own, they're dealing with an environment that is rapidly changing in terms of supply chain dynamics and demand fluctuations. Many companies also don't have robust processes that allows them to forecast what the market is going to look like and how they can make money on a consistent basis.
"The name of the game is very clear for us in private equity: you just grow revenue, you grow EBITA even more than you grow revenue, and you pay down debt and bank that cash and be ready for a sale at the end any point in time," Kiru says. "What we are seeing is companies that are flexible are able to evolve with their customer base and find those sweet spots where you can actually make money. I would bet a lot of companies out there really don't know they're costing, and the costing in terms of where you're making money where you're losing money, where do you want to be focusing on and how do you create that sizzle in the company when you go to sell? All those become really crucial factors."
