4 Keys to Preparing Your Business for Sale to Private Equity
Guest: Aakash Shah, a coach at CEO Coaching International. Prior to joining us, Aakash was the CEO of his family’s chemical company, which he grew from $3 million to $100 million in sales. Aakash is also an active YPO member.
Quick Background: Any business that wants to get BIG needs cash. And while taking on private equity investment can help the CEO accelerate a growth trajectory, streamline ownership positions, and prepare for an exit, don’t underestimate the amount of work that goes into finding the right investment partner. Your whole company might not be for sale, but your company should always be salable. The investments you make now in your leadership team, infrastructure, and long-term strategic planning will only improve your value when you sit down with interested parties.
On today’s show, Aakash Shah reflects on how his efforts to stabilize and grow his family’s business paid off with two private equity rounds and a BIG nine-figure exit.
Keys to Securing Private Equity from Aakash Shah
1. Build out your c-suite.
From start-up until that first growth plateau, the CEO might be the company’s de facto COO, CFO, CTO, and Chief of Whatever Else Needs to Get Done. In a family business, c-suite and team management roles might be loosely defined and shared among a handful of key stakeholders who all think they’re the boss.
Aakash learned that’s not going to cut it with a private equity firm. He wanted to grow his family’s company while both his brother and father were looking to step aside. The first round of investors they spoke to wanted more stability in the company’s leadership, which was reflected in lower-than-expected valuations.
“I think the business was very dependent at that point on just me,” Aakash says. “And there was a lot of concern there, because if any key risk is present, that limits your ability to scale the business. I think a CFO more than adds enough value to cover their cost. But beyond that, in a growing business, you really need to have an executive at the sales level. Someone who really understands how to structure teams and plan for channel partnerships, because any capital partner that’s going to come in will want to know how you’re set up for growth. And growth, most of the time in business, requires a sales strategy.”
2. Expand your support network.
A family business or start-up that hasn’t developed its c-suite probably doesn’t have a board of directors to bounce ideas off of either. Even the best people on your management team probably don’t have experience scaling a company, let alone securing a private equity investment. And if the CEO is juggling too many balls, it’s likely that he or she isn’t setting aside time to develop the key relationships that will support the company’s next stage of growth.
“Sometimes with a family business, you just have yourselves to talk to,” says Aakash. “And sometimes you don’t trust outsiders. But the value outsiders can bring, given their experience, given their network, their connections, has been invaluable. As we started to professionalize the business, we implemented SAP to get our data in place, and we hired a president who was very experienced that could report to me, but run the business on a day-to-day basis. I also joined YPO at that time. So that network for me became very valuable because I started going to my YPO forum and exchanging these ideas with eight other super smart CEOs who were challenging me. ‘Well, hold on, you have to have a strategic plan. You have to have an HR person in place to handle these things. This is how you scale your business. This is how you build your brand.’ So really my first outside board was my YPO forum.”
At these critical early stages, working with a CEO coach can also be invaluable. A seasoned executive who’s looking at your company with fresh eyes can help you identify holes in your leadership team, communication, marketing, and planning processes that could be off-putting to private equity firms.
3. Plan for the future while winning today.
After struggling to find investors who met his target valuation, Aakash went back to work. In addition to hiring a president, he built out his sales team and infrastructure, which drove up the company’s EBITDA. When he was ready to go back to investors, Aakash hired an investment banker with expertise in the chemical business.
And that’s when the real work began.
“The preparation for positioning the business for sale was a multi-year process,” Aakash says. “I think that’s important for people to understand. It’s not like you flip the switch and just decide to do it. We worked on our branding, our product development, our executive team, our data. Now you are not only running a growing business, you’re preparing to present your business to, in our case, up to 17 different groups that are interested in buying our business in a six-week period. The whole point of running the process with an investment bank is that they want to create competition. They want you to find your best partner, but if there’s not a time horizon that has a start and an end, it can easily drag on. So it was very important to have a very tight timeline.”
It’s also important that you communicate to your c-suite, team leaders, and, if applicable, family stakeholders what that timeline looks like and how they’ll be expected to contribute. The CEO is in charge, but securing a private equity investment requires a total team effort. If you don’t have the absolute best people working for you, both processes could stall and the whole company could falter.
“Not only are you bringing yourself to these meetings,” Aakash explains, “but also your key management team. The banker is trying to help bring on that partner and sell the dream of how the business can go to the next level. And so there is some distraction there because now instead of visiting customers or suppliers, you and your executive team are spending a lot more time with your investment banker, preparing and then actually physically meeting with these potential buyers or partners of your business. At the same time, you’re communicating with your family members that you’re doing everything possible to get the highest value for them as they’re exiting. So it’s a true balancing act.”
4. Find alignment with a potential buyer.
By working through a disciplined process, with support from a top-notch leadership team, investment bank, and an experienced CEO coach, you should be able to approach private equity from a position of strength. If you try to take shortcuts or settle for less than you know your company is worth, you could be entering into a relationship that’s far more trouble than the investment is worth.
One key to Aakash successfully selling 70% of his company was that he took it upon himself to dig deeper than the numbers. He researched whether or not potential investors had core competencies in the chemical space. And he talked to other CEOs within the private equity groups’ portfolios to understand how each group worked with companies they invested in. Were they supportive? Were they micromanagers? What was the communication rhythm like? Were they going to give Aakash the autonomy he needed to keep Making BIG Happen for the company as he prepared to exit?
“I think in today’s capital environment, there’s lots of options if you want to sell your business,” Aakash says. “And I think that people often have this fear that if I ask too many questions or if I make too many terms and conditions, the capital partners will run away. And it’s very important to have alignment. It’s very important for transparency and for the founders and the CEO to understand what the deal structure is going to be. How is it going to be financed? What is the debt going to look like? If the private equity or capital partner raises capital, are they going to take fees out of your company? If you don’t understand those things upfront, you can set yourself up for failure. Ask lots of questions. And then make sure that the capital partner truly is going to be involved in your strategic plan and let you, as the CEO, run the business, not just throw money your way and then kind of disappear. You want someone who can come in and help take you to the next level. And that’s what I’m fortunate to have had.”
1. Plan ahead. Private equity is not a shortcut to growth, it’s a process that requires clear goals, detailed planning, and a realistic timeline.
2. Build an investible company. Even if you don’t want to sell or exit right now, ask yourself, Is my company one that an investor would want to buy? If not, what are you missing?
3. Never settle. It’s worth investing time, people, and money to find the best equity partner for your specific goals.
About CEO Coaching International
CEO Coaching International works with CEOs and their leadership teams to achieve extraordinary results quarter after quarter, year after year. Known globally for its success in coaching growth-focused entrepreneurs to meaningful exits, CEO Coaching International has coached more than 1,000 CEOs and entrepreneurs in more than 60 countries and 45 industries. The coaches at CEO Coaching International are former CEOs, presidents, or executives who have made BIG happen. The firm’s coaches have led double-digit sales and profit growth in businesses ranging in size from startups to over $10 billion, and many are founders that have led their companies through successful eight, nine, and ten-figure exits. Companies working with CEO Coaching International for two years or more have experienced an average EBITDA CAGR of 67.8% during their time as a client, nearly four times the U.S. average and a revenue CAGR of 25.5%, more than twice the U.S. average.