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Retirement Plan

Selling Your Business

to a Private Equity Group vs. a Strategic Buyer

by Richard (Rick) Childress, CIMA , CRPC .
®
®
First Vice President. PIM Portfolio Manager
®
f you own a business, it can be Strategic Buyer
overwhelming to think about selling it. A strategic buyer is usually a company in the same or related
IOne way to gain some control is to learn industry that has some overlap or synergy that would result in
about your alternatives to help you better incremental savings or revenue if it bought your company.
understand what is best for you, your family, Key Considerations: Your company may be absorbed, which is
and your company. While buyers come in all important to consider if you value legacy. There may be a heightened risk
shapes and sizes, two of the most common for job loss, especially among senior leaders, as your team may overlap
are private equity groups (PEGs) and with that of the buyer. Each strategic buyer is unique as will be their
strategic buyers. transition of your company. The flip side is you may find it easier to walk
Private Equity Group from a strategic sale.
A PEG is made up of financial What Happens: Unlike a PEG, you will usually not be asked to
professionals who have raised money to buy reinvest in the company, and depending on your current role, you may
— and eventually sell — companies. be involved in a transition period of only a few months. What happens
Key Considerations: It is important to to your management team and the rest of your workforce depends on
consider your financial and timing goals the overlap with the buyer and its strategic direction.
to determine if a PEG sale is a fit. Your Risks: If you are paid in the acquiring company’s stock, you need
continued involvement will be based on your current role in the company. to consider the risk of owning that much of one security. If the buyer is
Are you comfortable running the company with another majority owner? a public company, you may be able to sell that stock and diversify over
Traditionally, PEGs target a three-to-five year holding period, after time, but that can be delayed if the stock is restricted. In that case, you
which they attempt a second sale of the company. can be prohibited from selling until after a vesting period or certain
What Happens: As a simple example, assume you sell your company conditions are met.
for $1,000. Assume also that the PEG funds the transaction with $500 If the buyer pays with private company stock, you need to know
debt and $500 equity and asks you to roll over (or re-invest) $100 so your path to liquidity. Until you do so, you will own shares in a larger
that you own a 20% equity interest. Your existing management — and company you no longer control, and it likely will represent a large
perhaps you — will be tasked with growing the business while paying percentage of your personal assets so you need to understand your
down the debt. ownership rights and remedies.
Now, let’s say you double the profits while completely paying off the Transitioning your ownership of a company is more complex than
debt during the PEG hold period. Assuming the same valuation multiple a typical retirement, but it can be less daunting if you understand your
of profit/cash flow, the business would be valued at $2,000 and you options.
would get 20%, or $400, for your $100 investment assuming all debt was For more information email: RChildress@agagewealthpartners.com
paid off.
Risks: Of course, there’s no guarantee the business will grow while
paying down the debt or that it will sell on favorable terms. In the
meantime, you will have a majority owner that is looking to exit in
a few years, so its goals and culture may not align with yours. When
considering a PEG, you want to be comfortable with them and their
level of involvement in the running of the company and understand how
decisions will be made.

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Wells Fargo Wealth & Investment Management (WIM) provides financial products and services through various bank and brokerage affiliates of Wells Fargo & Company. Trust Services are available through Wells Fargo Bank, N.A. and Wells Fargo Delaware
Trust Company, N.A. Any estate plan should be reviewed by an attorney who specializes in estate planning and is licensed to practice law in your state.Wells Fargo & Company and its affiliates do not provide tax or legal advice. This communication cannot
be relied upon to avoid tax penalties. Please consult your tax and legal advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the
time your tax return is filed.This advertisement was written by Wells Fargo Advisors Financial Network and provided to you by Richard (Rick) Childress, CIMA®, CRPC®. First Vice President. PIM® Portfolio Manager.Investment products and services are
offered through Wells Fargo Advisors Financial Network, LLC (WFAFN), Member SIPC. Agape Wealth Partners of Edwards Asset Management is a separate entity from WFAFN.
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