How to sell your company twice…

Everyone dreams of some day selling their startup for big bucks. But how about getting to sell your company twice?

Most often, when we think of our exit strategy, we think of strategic buyers like Google and Facebook. Most exits are strategic exits to larger partners or competitors.

However, a small but growing category of buyers enable entrepreneurs to have two bites at the apple, and in effect, sell their company twice.

Private equity (PE) has been around for a long time. Pioneers such as KKR helped establish the buyout industry. Buyouts began in traditional manufacturing sectors. Typically, PE buyers would find underperforming businesses, install new management, add a pile of debt and get to work.

PE has come a long way since those early days and now covers all sectors and stages including technology.

The traditional, debt-driven PE playbook doesn’t translate well to high-growth technology companies. Nevertheless, PE buyers have shown a strong appetite for the tech sector. According to Pitchbook, there have been 606 PE buyouts in the information tech sector in N. America so far this year worth a combined $ 167B. Firms such as Vista Equity Partners have made some major acquisitions including Marketo for $1.8B.

Choosing PE over strategic buyers

So when should you be thinking about PE buyers over strategic? The truth is, you should be thinking about both simultaneously. Strategic exits are still the majority. But there are specific circumstances where PE could make more sense.

If, for example, your early investors want an exit, but you want to keep growing, then PE buyers could buy out your early investors. In addition, they could provide you with some liquidity and give you the comfort to push for a bigger outcome.

Alternatively, a PE buyer might have already bought a company that it considers to be a “platform”. It then works with management of that company to identify complementary targets to combine with that platform company.

Finally, you may have a vision for how your company could become the next platform. Through a combination of building and buying new products you can transform your company into something much bigger. PE can enable that.

In all cases, even after the PE deal is done you retain considerable upside equity incentive. In the simple case of a recapitalization (buying out the old investors), the PE investor will own a large minority or small majority of the company, but you still retain your stake. Even when you sell to a portfolio company of a PE firm, you will have significant upside in the combined company.

This equity incentive is one of the key tools of PE buyers. They want management to be driven to work hard to create value. Unlike venture capital (where losses are expected), PE buyers expect to make money on every deal. This is why they invest much later than VCs do. Every deal must have a clear thesis, detailed playbook/ execution plan and every deal must motivate management to deliver superior returns.

When all is said and done and you finish the PE stage you can end up having two exits: the one that got you working with the PE firm and another, much larger exit when you have executed the PE plan.