When a private equity (PE) firm buys a business...
So there's six things to keep in mind. The first thing is they're going to want to keep you. Well, most people think after they sell their company, they're going to cash the check, go to Aruba, and sip fruity drinks. That's not the way it goes. You're going to need to stick around at least for a transitionary period to teach them the business. The second one is they're going to fire you. You go, whoa, wait a minute, Jim. The first one was they're going to keep me and now they're going to fire me? Yes, they're going to fire you. Almost in every case with the CEOs we've worked with, after they've been bought by a private equity buyer, within one year, they're fired. Why? Because there's a fundamental disagreement in how the business should be run and either the CEO leaves or the private equity firm asks them to leave. The third thing they're going to do is they're going to put debt on your business. Why? Because they can and that's part of their model. So you have a zero debt mentality, you're going to need to get comfortable with debt because that's how private equity firms maximize their return on their investment by including debt.
Summary
Private equity firms retain management briefly post-acquisition but often replace them due to strategic disagreements. They utilize leveraged buyouts to finance purchases, expecting future cash flows to manage debt while enhancing profitability for eventual resale.
Key Points
- PE firms often retain existing management for a transition period.
- Conflicting views may lead to leadership replacement by the PE firm.
- A leveraged buyout involves adding debt to the company's balance sheet.
- Future cash flows are expected to pay down the added debt.
- PE firms aim to streamline costs and boost profitability.
- The goal is to sell the company at a higher valuation after several years.
Tags
Repurpose Ideas
- LinkedIn post: Key insights on private equity acquisitions.
- Tweet: 3 critical takeaways from private equity buyouts.
- Checklist: Steps to prepare for a private equity acquisition.
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