Selling to private equity can be exciting and lucrative. But before you sell, you need to know what comes next for the organization, its employees, and for you personally. Speaking with TechExit.io, Narbe Alexandrian, founder and CEO of Define Capital, shared the key questions every founder should ask before a PE acquisition.
Key takeaways:
- You need to know what happens to the company after you buy it—what’s the growth, employee, and management strategy?
- Selling a company has wide-ranging personal financial implications; you need to know how this impacts you in terms of taxes and cash flows.
- Know what you want to do next—at least at the very beginning—to ensure a smooth transition of power.
Rather than going for a “second bite,” Narbe Alexandrian, founder and CEO of Define Capital, offers founders a permanent home for their company.
Define Capital’s approach offers some legacy protection for founders and gives some confidence to employees and customers alike that the company won’t be stripped for parts. However, not all PE firms operate this way, even those that take a “permanent capital” approach.
Narbe explained that founders have to figure out both if PE is the right next step and which firm is the right next home for their company. Speaking with TechExit.io, he shared the three key questions founders should ask.
What happens to my company after you buy it?
Whether looking for an exit, realizing you need one, or simply entertaining a great offer, you need to know how the acquirer operates—and what they plan to do with your organization after acquisition.
This helps avoid what Narbe called a typical pattern in private equity:
- A firm acquires a company from a founder.
- In search of profitability, the PE firm might cut staff in R&D and might increase prices because the product is sticky with customers.
- There is also an earn out—the founder doesn’t get their full valuation until they stay on board post-acquisition and increase sales.
Suddenly, that founder is in a risky spot.
“The whole game has changed,” said Narbe. “[With a traditional PE approach to profitability], you may end up with fewer people on R&D and a higher price, so it’s harder to compete. You’re not going to hit that potential that you want.”
Narbe added that understanding what comes next is also a question of legacy.
“If they push back and say, ‘Well, that’s none of your business and you’re not going to be part of the company anymore,’ still try to figure it out because you want to make sure that your employees and your legacy are in the right hands.”
What are the personal consequences of selling?
Selling a business can initially feel a lot like closing a new client—you talk about prices, deal terms, and contract specifics. But in this case, a signature means you’re moving on.
Here’s what Narbe recommends founders think about:
Personal finances: Not only will you pay taxes on the sale, you won’t have business cash flows in the future. How will you pay for your lifestyle? If it’s with dividend-paying investments, those will also carry different tax rules than earned income. Further, you won’t be able to run expenses through your corporation.
Advice: Narbe recommends working with an advisor, or hiring a banker or broker—this can bring more money to the deal with a competitive process. But even if it doesn’t result in a higher valuation, a professional who has done this dozens of times can help make the entire process smoother.
Seller readiness: A business is like a child or spouse—it’s a significant part of a founder’s life and they are proud of what they built. Are you really ready to move on? If not, what balance of cash off the table and involvement are you looking for?
“They’ve gone through trials and tribulations,” said Narbe. “They’ve sacrificed missing their kid’s hockey games and soccer games, and instead staying at work to fix something for a customer. You want to make sure that they actually want to go down this path, and it’s something that they’re comfortable with.”
What do I want to do next—and why?
Moving on from your business—and your daily routine built around it—will create a vacuum in your life. How will you fill it?
Narbe said the most successful transitions he’s seen are often into retirement or toward a charitable adventure. That’s not to say you can’t be successful starting another business. However, you should know why you want to start fresh versus continuing on—at least for the sake of the deal, if nothing else.
“If you’re switching one vertical software for another vertical software, and you want to start all over again… you kind of have to question why,” said Narbe. “Does that make sense? And is there something that I [as an investor] don’t know within the business?”
Protecting a legacy
Businesses, particularly ones people run for decades, become a part of you. Even if you are completely ready to move on, you’ll still be leaving a part of you with the business.
This reality is also a key part of Narbe’s permanent capital approach.
Unlike the types of private equity famous for stripping down companies and selling off assets for profit, Narbe wants to keep small and mid-market business legacies alive. This includes keeping brands active and teams cohesive; after all, Narbe’s research suggests most mid-market companies are under-staffed, rather than overstaffed and in need of a trim.
A transition still needs to happen, though, so the team knows they can look to new leadership. But one thing is for certain: there’s very little risk of your company disappearing into the wind.
“I always tell founders [their] legacy is never going to change—that logo that’s up on the wall or up on the building… I will never change that logo. You can go to your great grandkids and say, ‘That’s the company that I built,’” said Narbe.