What to Expect from Private Equity Ownership

HOST: LIZ SLOBASKY: Welcome to The Drawdown, a podcast by Cherry Bekaert's Private Equity practice. In each episode we explore the latest trends in the private equity sector as well as challenges and opportunities in the ever-changing investment environment.

HOST: LIZ SLOBASKY: My name is Liz Slaski. I'm a director in the Cherry Bekaert Transaction Advisory Group. Today I'm joined by a few of my colleagues as we discuss what it's like to be owned by a private equity firm.

HOST: LIZ SLOBASKY: Recently we've been getting a lot of questions from clients who are interested in selling their business and want a better understanding of what to expect, especially when it comes to private equity. To help paint a picture, we've rounded up a few members of our transaction team who each have a unique perspective of working closely with private equity firms, either working with the investment team or as a portfolio company.

HOST: LIZ SLOBASKY: To kick things off, I'll ask each of them to introduce themselves and give a quick background of their experience. Sidney, why don't you kick us off?

SIDNEY GLICK: Sure. My name is Sidney Glick. I'm a partner in our Transaction Advisory Group. Prior to Cherry Bekaert, I worked for a number of years at one of the largest public leveraged buyout firms.

SIDNEY GLICK: When I started at the company, which was probably back in 2000, we had about $550 million assets under management and grew over the next 11 years to about $28 billion. At the time we had a portfolio of over 200 companies.

SIDNEY GLICK: I have a lot of background on working within a private equity firm as well as on the other side as an advisor to private equity firms and clients.

HOST: LIZ SLOBASKY: Great. Thanks, Sidney. Jason?

JASON PAINER: Thanks, Liz. My name is Jason Painer. I'm a managing director in the Transaction Advisory Practice. Prior to joining Cherry Bekaert, I spent 13 years as the CFO of a distribution company.

JASON PAINER: When I originally joined that company, it was owned by a small number of individuals. Shortly after joining, they sold a minority ownership stake to a private equity firm. About 14 months following that transaction, the ownership team along with the private equity firm sold a majority stake to a larger private equity firm.

JASON PAINER: After about nine years of ownership, during which we navigated a recession, we served as a platform for acquisition and completed nine acquisitions. We changed our accounting system and eventually sold to a strategic buyer that was also backed by a large private equity firm. I later joined Cherry Bekaert and now assist others in the buying and selling of their companies.

HOST: LIZ SLOBASKY: Perfect. Kim, please introduce yourself.

KIM PALMA: Sure. My name is Kim Palma. I'm part of the Advisory Services team at Cherry Bekaert. My background is similar to Jason's; we both started together in the same public accounting firm and then I joined him when he became CFO of the distribution company he mentioned.

KIM PALMA: We worked together through different changes in ownership with private equity firms. After leaving that company, I worked for another private equity-owned company and now I serve clients who have private equity ownership.

HOST: LIZ SLOBASKY: Sidney, when is a good time for a company to start thinking about partnering with a private equity firm?

SIDNEY GLICK: That's a great question. To start, there's a lot of breadth and scope in the industry. There are over 3,500 private equity firms in the U.S. and last year, despite COVID, 5,300 private equity deals closed, resulting in over $700 billion of capital invested.

SIDNEY GLICK: When a business owner considers partnering with private equity, they need to consider their goals. Are you looking for a liquidity event to take some chips off the table but remain with the business? Are you seeking a minority equity deal? Do you want to retire and sell the business outright in a control transaction? Or are you looking to raise debt capital without diluting your equity?

SIDNEY GLICK: There are firms that focus on all of these structures across different industries. One critical point is not to rush into a sales process. A lot of preparation must be done on the front end.

SIDNEY GLICK: When a strong business comes on the market, private equity firms will often pay top dollar if it makes strategic sense, such as fitting their industry focus or serving as an add-on to an existing portfolio company.

SIDNEY GLICK: In preparing your business for sale, owners should ensure financials are in order. That doesn't necessarily mean you need an audit, but at a minimum you should consider doing a sell-side quality of earnings report. You should also address tax structuring and have a well-thought-out succession plan.

SIDNEY GLICK: That could mean identifying a number two at the company who can take over, ensuring you have the right executive management team, and that customer contracts and other documentation are in place. There are many things involved, and we assist businesses with these preparations day in and day out.

HOST: LIZ SLOBASKY: Jason, with all the different funding options available, what are the benefits of having a private equity firm as an investor?

JASON PAINER: Sidney touched on several main points. With private equity ownership, you have options regarding how much of the business you want to sell, such as a minority stake or a majority stake. This allows owners to take out partial or all of the equity they've built up and diversify their net worth into other investments.

JASON PAINER: Private equity ownership often involves investing in the management team and owners as much as the company's industry, and they typically want those individuals to invest alongside the private equity group. This allows owners and management teams to participate in a second liquidity event in future years.

JASON PAINER: Another benefit is access to financing institutions through senior lenders or mezzanine debt. Private equity firms have relationships with lenders, and portfolio companies often gain access to lenders they wouldn't have had previously. Many lenders trust the investments private equity firms are making.

JASON PAINER: Private equity professionals bring expertise in financing, acquisitions, and operational management, which augments the current management team's capabilities. Having those resources helps management tackle challenges and feel less isolated in decision-making.

JASON PAINER: Finally, private equity firms often introduce or bring in advisors like Cherry Bekaert when a challenge or event falls outside the company's expertise. Those internal resources and external advisors help portfolio companies navigate changes during ownership.

HOST: LIZ SLOBASKY: Kim, one concern we hear often is what happens to employees after a sale to private equity? How did work life change for you and your employees?

KIM PALMA: For most of our employees, there wasn't much change in day-to-day activities. Our operations and accounting groups continued to support the company's business as before.

KIM PALMA: The biggest change I saw was in documentation and reporting requirements. Items that previously owners had more discretion over—like expansions, budgets, or bonus plans—became more formalized, and we were held accountable to them. That was the biggest operational change.

HOST: LIZ SLOBASKY: Sidney, when you worked at a private equity firm, what were your expectations of the companies you had investments in?

SIDNEY GLICK: A few things. Companies encounter bumps all the time—customers leave or macroeconomic impacts occur. When a private equity firm invests, it's investing in a partnership, but there are metrics the firm expects the company to hit. Private equity firms are driven by growth and will support the company in meeting objectives.

SIDNEY GLICK: When issues arise, the expectation is transparency. Private equity firms expect management to provide insight into what's happening so the firm can act as an extension of the management team and help overcome pitfalls.

SIDNEY GLICK: Another key expectation is timely financial reporting. Companies that haven't been private equity-backed may produce financials annually or quarterly, and much information may reside in an owner's head. Private equity firms help sophisticate the quality and timeliness of financial and management reporting so the board and key management can proactively make decisions.

HOST: LIZ SLOBASKY: Jason, as a CFO, how often were you communicating with the private equity group and what was the nature of the interaction?

JASON PAINER: It varies by firm. You'll see more communication at the front end as the private equity group learns about the company, its operations, and reporting. Initially, we met weekly by phone or video, and there were scheduled board meetings, typically quarterly.

JASON PAINER: Private equity firms often bring experts outside the company to join the board. We produced memos and reporting packages summarizing the month. Typically, phone conversations happen weekly or biweekly, and as routines develop, communication becomes less frequent.

JASON PAINER: One caveat: if things go bad, the private equity firm will take a more hands-on approach, either through their advisors or directly through their team if they have the expertise.

HOST: LIZ SLOBASKY: Sidney, any additional context on why private equity firms request so much information?

SIDNEY GLICK: Private equity firms ask for information not to create a burden but to support management teams. They also have LPs and GPs—limited partners and general partners—to whom they must report on their investments and portfolio performance. Board calls and reporting help fulfill those responsibilities.

HOST: LIZ SLOBASKY: Kim, anything to add?

KIM PALMA: They're building metrics, so reporting expands and they track a lot of history. That information supports acquisition integration decisions and helps during economic downturns. The reporting is recorded and maintained, and you become more sophisticated in understanding what makes the company successful and profitable.

KIM PALMA: All of these reporting changes didn't happen overnight. It was a gradual process where the firm gave us time to develop reports, and as our business changed, the reports evolved and improved over time.

HOST: LIZ SLOBASKY: Jason, what should a business owner be thinking about when searching for a private equity firm?

JASON PAINER: Key factors we considered were the type of ownership we sought—minority or majority. Our first sale was a minority transaction to take out some equity; the second was a majority sale to support growth and focus on a later liquidity event.

JASON PAINER: Consider the private equity firm's typical hold period. Some prefer three to five years, others seven to ten or more. That should align with management's expectations and goals.

JASON PAINER: Also consider how involved the private equity firm likes to be in day-to-day operations. Are they hands-on or more macro-level? Expectations should align with management's goals.

JASON PAINER: Ultimately, it comes down to culture and relationships. Private equity firms have similar goals—to grow and achieve a return on investment—but who you connect with and can work with over the next several years matters.

SIDNEY GLICK: I would add that business owners should talk to other owners who have sold to the private equity firm to hear about their experience. Speak with portfolio company owners and those who have already exited.

SIDNEY GLICK: It's also important to consider industry expertise. Some firms focus on specific industries, and friction can occur when a firm invests in a space they're not familiar with. That can create frustration and a steep learning curve.

HOST: LIZ SLOBASKY: Sidney, where should someone start the process if they're interested?

SIDNEY GLICK: You can certainly reach out to any of us at Cherry Bekaert; we'd be happy to discuss individual situations. Another option is to talk to an investment banker, who works with companies and helps sell businesses to private equity firms and has deep knowledge of likely suitors.

HOST: LIZ SLOBASKY: Thank you all for your time. We hope listeners find the right fit for them, as private equity can be a great partner when you find the right one.

HOST: LIZ SLOBASKY: Thank you for listening to The Drawdown, Cherry Bekaert's Private Equity podcast. The views presented by our guests do not necessarily represent the views of their respective firms. For more information on how Cherry Bekaert serves as a guide forward to private equity funds and their portfolio companies through accounting, tax, and advisory services, please visit cb.com.