When a private equity portfolio company is being prepared for sale, it can be a confusing time for employees. Most people do not understand the PE business, and therefore have a cautious attitude due to what they read in the news. No one likes uncertainty, especially if it may impact their job security during a business sale.
Recently, a client asked me to educate his staff on what to expect as their PE owner started to prepare for their inevitable exit. I suggested we discuss four specific questions with employees to help them understand the process, the impact on their employment and their role in achieving a successful exit.
PE started in the 1600s, with the East India Company being the best example of wealthy individuals funding new ventures. Later, in the 1850s, a few wealthy families developed the US railway system. The modern PE industry started in 1946, when ARDC and J.H. Whitney went into business. The highpoint of the industry is thought to be the 1980s, when Barbarians at the Gate became a movie.
As the industry matured, its relative advantage over public equities decreased as deals became more competitive, prices grew and the impact of Sarbanes-Oxley drove capital to the private markets.
The easy gains from the financial engineering of the 1980s and 1990s were squeezed out, and investors learned they had to create true value to earn the returns their investors expected.
The bankers, lawyers and consultants all became highly adept at facilitating transactions. The various players in the market specialized and the market fragmented by market value, debt, equity, industry and stage.
Today, the industry has fully matured as all industries do over time.
The classic PE fund lifecycle is shown in the attached graph. Fundless sponsors and one-off dealmakers have a similar process, but not as well-structured.
The animal kingdom has predators, prey and carrion feeders to complete the circle of life. The capital markets have a similar cycle but without the morbid overtone. Capital flows to the worthy, and the unworthy get restructured or go away. That is, in fact, the beauty of capitalism—millions of decision-makers, collectively, make a better decision on which capital will be rewarded.
During the presentation, it became clear by looking at people’s faces that understanding the overall process helped to calm nerves and reduce their fears about their job security during a business sale. They now had a well-fitted lens with which to view events.
Most people work their whole careers and may never be involved in a sale transaction, so it is foreign to them. In fact, most private business owners are not involved in a transaction until they sell their business. They may have no experience in what is likely to be their most important decision.
What deal professionals take for granted is foreign to most of the employees of the selling entity. This second graph helps people understand how the process ramps up to a closing; this explanation helps them to prepare for the numerous distractions along the way.
I always counsel the leadership to understand that the deal will be a full-time, second job as they race to a close.
At the end of any discussion regarding a transaction, employees always ask “What does this mean to me?” The answers are simple: stay focused, do your job, follow management’s direction, and you should be ok.
There is no guarantee you will have your job, whether there is a transaction, market downturn or global pandemic. But staying focused and being a good performer is the best way to assure job security during a business sale or PE exit.
Uncertainty and change are guaranteed, but that is not a reason to panic. Management is responsible to set and manage expectations commensurate with the situation. That is true whether there is a transaction or not.
Leadership needs to keep everyone focused on doing their job, so that EBITDA goals are delivered and the process runs smoothly.
While transactions initiate uncertainty and change, management still needs to keep everyone focused on doing their job. A basic understanding of the process is a good place to start.
©All Rights Reserved. September, 2020. DailyDACTM, LLC d/b/a/ Financial PoiseTM
Bruce Werner is the Managing Director of Kona Advisors LLC and served as an outside director on private company boards for the last three decades. Kona Advisors LLC provides advisory services to the owners, investors and CEOs of private and family-owned businesses. With deep experience in governance, succession planning, finance, strategy and management issues, Kona…
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