By Larry Brown, Executive Vice President, Sales and Purchasing, Coastal Sunbelt Produce
Produce distribution companies in North America are traditionally multi-generational family owned and operated businesses. As part of the process of succession planning, ownership typically explores several options for passing along the business. Private Equity (PE) is one option available (another article discusses ESOPs as an option).
Things to consider when exploring the option of PE:
- Selling to PE is an opportunity to monetize for the owner(s) and capitalize for the business.
- PE is very interested in the owner(s) desires and plans for the future. How long do you wish to continue in the business? Do you want to cut back your hours? Do you want to be less involved in the day to day? They can help you with your succession planning.
- PE acquires management teams more so than just businesses. PE does not want to manage the day-to-day business. They are investing in the current management team to build shareholder value over a somewhat loose time frame of five to 10 years depending on the PE.
- PEs buy companies and are by far the majority shareholder. They do expect the ex-owner(s) to reinvest a portion of their proceeds back into the company.
- If you are considering PE, make sure you remember the Golden Rule. He who has the gold rules! There will be an adjustment as ownership shifts. It is your job to interview PE and do reference checks. You want to be with a firm where you are considered a partner in practice and not an employee.
- It is important to have good and effective financial systems in place for the due diligence process as PE will evaluate profitability, balance sheet, cash flow, customer concentration, market share, human capital and more as they value your company. They will want to look back for five years to see the trends of the company.
- It is equally important for you to be able to demonstrate a business plan for the future. What is the trajectory of your company over the next three to five years? Top-line growth as well as bottom-line growth is important.
- Results matter. If the company performs well to plan, there is less involvement from PE. There are monthly calls and quarterly meetings to review results and fine-tune future performance.
- PE brings about a certain level of professionalism to the companies they own.
PE is a viable option to:
- Take some money off the table for personal and family purposes.
- Revitalize your company with an infusion of capital to take your company to the next level.
- Build an effective succession plan for the future.