Kicking off our From Fork to Fund series, we reviewed the basics of private equity and alternative liquidity strategies. Since making the determination to take on private equity investment can take significant time and require significant cost, preparation for the pending transaction is key. In addition, there are a few critical items a company should address to make them attractive to private equity investment when going to market.
Ensure private equity is your preferred exit option.
As we covered in our first edition, the overall goal of the private equity firm making the investment into the company is to sell the company in a subsequent transaction at a sales price that will generate a return for the investment fund. As a result, the private equity firm will typically have the biggest presence at the table when making business decisions and therefore, have the ability to make changes that significantly impact the company. As a result, the prior owners may have a very diminished say in key business decisions. Giving up control is often one of the biggest changes and challenges in the business in the eyes of the owners selling to private equity and those who may retain a portion of ownership post-transaction. The parties participating in the deal should be aware of the lack of control they may have over the business which they once had unfettered control. The goals of the seller should be in alignment with the private equity firm’s goals to ensure a proper transition and operation of the business.
Prepare for carrying out the due diligence process.
After both parties sign a Letter of Intent (LOI), the time period for the buyer to perform their due diligence of the transaction commences. The due diligence process will take a deep dive into many factors of the business including legal, employment, environmental, and what we will cover, due diligence on financials and the company’s tax position. During the due diligence process, the buyer will request a large amount of data that the company is likely unaccustomed to providing and will need to be able to respond accordingly or risk additional questions from the buyer, a reduced purchase price, or worse, a collapse of the deal.
From a financial statement standpoint, it is wise to have financials that are compliant with GAAP and reviewed or audited by a public accounting firm. In addition, the company should be prepared to provide accurate financials on a stand-alone business if only a portion of the company is being sold versus the entire business. As part of the financial statement due diligence, the acquirer will likely perform a Quality of Earnings (Q of E) analysis. To understand the process which your company will be subject to during a Q of E analysis, click here. From a tax side, the company should first evaluate its filing requirements for all tax types (i.e., income, franchise, sales, real estate, property, and payroll) to ensure they are being subjected to appropriate taxes in all jurisdictions or have performed a risk analysis of any non-compliance. In addition, the company should be current on all tax filings and have the filings available for the buyer to review.
Evaluate your current management structure.
Taking on private equity investment (from preparing to go to market to managing the due diligence process) will take a robust management team who can manage the transaction process while still maintaining the day-to-day business operations. In addition, when a PE firm wishes to retain existing management, the PE firm will want a strong management team in place to manage and continue the growth of the company through the second exit as transitioning management is disruptive. In addition, the PE firm will look for current leadership to continue to attract and retain top talent within the company.
Following these few but critical steps will be key in handling and closing a successful transaction. Stay tuned for next month’s issue of Table Talk, where we will discuss the economics of a private equity deal. Be among the first to receive industry news and advice delivered straight to your inbox by subscribing today.
To discuss this information in more detail, contact Ryan Kilpatrick or a member of your GBQ team.
Article written by:
Ryan Kilpatrick, CPA
Director, Tax & Business Advisory Services
