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When private equity is knocking

If optimizing your return is a top priority, selling a business to a private equity fund could be the most attractive option.

 

“Private equity funds may be able to pay more for a business,” than other succession options, according to Trevor Bare, a consulting actuary with Conrad Siegel in Harrisburg.

Private equity funds raise money from wealthy individuals and institutions to buy and sell businesses. They typically don’t take an active role in the companies they buy, but still look to help them grow and become more profitable.

“If you step back and think about it, why would someone come into a successful business and change everything on day 1,” said S. Graham Simmons, a partner with law firm Norris McLaughlin in Allentown. Simmons also is co-chair of Norris McClaughlin’s business law group.

A private equity fund buyout could include:

< Growth with capital but not a management change. That means investment comes from the outside to fuel growth, and management remains the same as before the buyout.

< A leveraged buyout, which could involve raising capital or taking on debt to acquire a company. Debt or investment, which may be pooled from a variety of new investors, comes from outside the company to purchase a controlling share.

< A sector-specific focus. This would involve investment by a private equity firm with an interest in a particular industry, like manufacturing or financial planning.

 

Simmons said in many cases the original owners are given a chance to reinvest in the company themselves and realize some additional benefit from the change, such as income or a non-controlling share of the company.

Employees may be incentivized with opportunities to grow professionally or buy into ownership through some type of program, too, experts said.

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