Typically, when founders and management teams think about their exit strategy, they are thinking about selling to a strategic company such as a Salesforce or Google. A large incumbent in their industry with a history of acquisition. Ideally, a buyer that they already partner with, since it’s rare for buyers to just show up and want you.
For many reasons (outlined below), it makes sense for companies and their investors to expand their exit alternatives to include buy-outs by Private Equity (PE) investors.
Historically, PE funds have focused on more traditional industries. But in the last few years, they have turned their attention to software and SaaS.
Firms like Vista Equity Partners, Providence, and others have become prolific buyers closing massive deals such as Vista’s purchase of Marketo for $1.8 billion and smaller deals such as the recent acquisition of Toutapp.
PE has grown considerably as an asset class. With larger and larger funds, PEs are now chasing growth. Software and SaaS companies offer lots of potential for growth.
Selling to strategics vs. PE
In a typical strategic sale, you sell 100 percent of your company. You get consumed by that company. Your product may or may not continue on a stand alone basis. You now have a boss. Or many bosses!
While there are no official stats, prevailing wisdom suggests that one out of every two strategic acquisitions are considered successful. That’s a pretty depressing stat.
If you have VCs that need an exit but you don’t want to actually sell, replacing your VCs with a PE resets the clock. They get an exit. You keep your company.
Given these statistics, you may be wondering why M & A deals happen at all. The fact is, the deals that succeed create lots of value. That’s why buyers keep buying. But as a seller, there is a high probability that your particular deal won’t work. While you may have gotten a great payout, your baby will be gone.
Now, contrast this with selling to a PE investor. PE funds usually take a controlling stake. A typical deal might see the fund buying 70 to 80 percent.
Many founders who don’t want to actually sell their company today initially balk at the notion of selling control. But, in many cases, they already have < 50 percent of their company. They have just sold control to a group vs. one firm. Once a PE has invested, they work very actively with you and your team to do two things:
- Drive operational excellence to improve profitability
- Engage in an organic strategy to add new products to your business through acquisition.
All investors, VC and PE alike, talk about their value add. While there are some great value-add VCs, typically they are more hands off. In contrast, PE investors are heavily involved. This can be good or bad, depending on your perspective.
Early-stage VC is all about outliers. Out of 10 investments a VC is looking for one or two to generate all of their returns. In stark contrast to this, PE funds expect to make money on every deal they do.
This actually creates a high degree of alignment between you and your PE investors. Unlike VCs, you don’t have a portfolio. Your ownership of your company is likely the single largest component of your net worth. So, it actually makes sense for you to be working with a partner that fully expects make money with you, not just from their overall portfolio.
Top five reasons to consider a buyout
Putting this all together, here are the top reasons to consider a buyout vs. a sale to a strategic:
- About half of strategic sales fail to meet their objectives. In contrast, most PE deals succeed.
- If you have VCs that need an exit but you don’t want to actually sell, replacing your VCs with a PE resets the clock. They get an exit. You keep your company.
- With a strategic sale, you have a boss. With a PE deal, while you have a highly active board, you are still in charge. Your company remains independent.
- PEs will work actively with you to build a company that you would likely not be able to build on your own. They do this by driving operational excellence and turning you into a buyer of companies.
- Since you retain significant upside and since your PE investors help you achieve a bigger outcome than you could alone, a PE sale gives you ‘two bites at the apple’ — you get a partial exit today, but continue to hold a meaningful stake that should grow substantially before an ultimate exit.
Syndicated with permission from Mark MacLeod’s Real Exits blog