7 Questions You Should Answer Before Selling to Private Equity

The assault of private equity on the service trades is well documented. It seems every contractor knows someone in his or her market who cashed out. If you’re getting the itch to explore the private equity opportunity, here are seven questions you should answer.

1. Are you in residential service?

The private equity land rush began during COVID when the money guys noticed residential service companies in the trades were not just surviving, but thriving. This is because homeowners absolutely needed service during the pandemic. Construction and commercial didn’t do nearly as well. Private equity wants service companies, which they see as resilient. If you are not in service, your business is not nearly as attractive.

2. Do you own a business or a job?

If you are a single truck operator, no one will buy your company. The best you can hope for is a contractor who will buy your customer list on a royalty basis. You do not own a business. You own a job. In fact, if your company cannot run without you, it’s not a business. It’s a job and one with a crummy boss, terrible hours, and low pay when all of the hours are factored in. Grow your company until you are unnecessary for the day-to-day operations. Then, you might find running it is so much fun and so lucrative that you don’t want to sell.

3. Does your market have room to grow?

Private equity is growing by acquisition, but they are buying companies they believe have “lots or runway” or room to grow. Contractors in metro areas have unlimited runway. Those is rural communities do not. An approach you can take is building satellite operations in nearby towns so that you can claim a big runway by replicating your strategy across other rural communities.

4. Are your financials in good order?

If your idea of a financial statement is your last tax return, you will be unable to sell your business. Good financial statements are more than a solid income statement, balance sheet, and cash flow statement.

Good financial statements are clean financial statements. That means you’ve separated your personal expenses from your business expenses. The financials reflect company performance that is not distorted by using the business as your personal, private piggy bank.

Financials prepared by an outside CPA are better than company generated financials. Even better is a Quality of Earnings (QofE) report prepared by a reputative CPA firm. The QofE report lowers buyer risk, which increases the amount buyers are willing to pay.

5. Do you understand your financial goals?

Too many contractors get obsessed with multiples of EBITDA (earnings before interest, taxes, depreciation, and amortization). Most of the hearsay they hear is more inflated than the latest fishing story. Multiples can be skewed based on a number of factors.

So, forget the multiple. Instead, identify what you need financially from the sale of your business. Set the dollar amount as your minimum. Be happy if you can get it. Walk away if you do not. Be thrilled if you get more.

6. Have you sold a company before?

Few people sell a business one-time, let alone multiple times. If this is the first time you are selling a business, you do not know what you do not know. What you do not know is a LOT.

Moreover, if you are selling to private equity you are selling to people who buy businesses with regularity. They know what they are doing. For your first sale (and really, for future sales) you should invest in a representative, such as an investment bank, mergers & acquisitions advisor, or business broker. They will keep you from making unforced errors and ultimately generate a premium over what you could get on your own that more than covers their fees.

7. Are you willing to stay around?

While there are rare exceptions, almost every private equity buyer will want the seller to hang around for a while. Most will financially entice the owner to stay with earnouts and equity rolls. Your roll is to transfer your tribal knowledge, ensure a replacement is ready to run the operation, and then, get out of the way. Whether you plan to stay or not, buyers want to believe you will. In the end, few business owners last two years.

There has never been a better opportunity sell a contracting business than now, as long as your company is well positioned, well run, and well represented.

Matt Michel is co-author of the book, The Business Exit Rollercoaster with Brandon Jacob. You can buy your copy on Amazon.