If you’re selling your business to a private equity group, expect changes once they take the reins. Private equity firms aim to acquire assets cheaply, often using debt to boost returns. They make money by integrating your business with their other acquisitions, spreading your overhead across more revenue, finding synergies with their other holdings, and implementing “operational improvements.”
“Operational improvements” is a euphemism for questioning, dismantling, and sometimes overturning your past decisions in favor of industry best practices. You’ve been making decisions inside your company for years. Everything your company does and believes in is a result of decisions you’ve made or tacitly endorse, so you can imagine how it feels to stand by as your decisions get scrutinized and overturned.
Oftentimes the private equity group is right. They’ve seen lots of businesses like yours and may be able to suggest things that will improve it. But other times their clinical review of your business fails to grasp some of the emotional glue that holds it together, and in a head-to-head contest, book smarts often loses to street smarts. Even if your business appears inefficient to an outsider, there may be intangible reasons for its success.
Consider Mark Zweig, who built Zweig Group into a $19 million company serving architects with trade shows, research and magazines. Zweig Group boasted a vibrant culture thanks to profit sharing, employee ownership, and open book management. As he revealed in this week’s episode of Built to Sell Radio, Zweig and his partner sold their company to a private equity group for $10 million, receiving $8 million in cash and retaining $2 million in equity.
His new owners saw inefficiencies in Zweig’s compensation structure. They believed scrapping the profit-sharing scheme would boost profitability. However, they failed to grasp that the profit-sharing plan was essential to the company’s success.
Abolishing profit sharing led to a cultural decline. Employees left, and revenue plummeted to $3 million a year. The private equity group’s failure to meet lender covenants resulted in bankers seizing control, wiping out Zweig’s $2 million equity.
Clip of the Week
In this clip, Mark Zweig shares what happened when he sold his company to a private equity group and the disaster that ensued.
Quote of the Week
“They blew it. I mean, it’s a classic case. They basically threw out every single thing that we did that made us great. They killed the company-wide bonus program. They stopped being open book. They pitted everybody against each other. They just frankly stopped doing what made us a successful company, and it just completely cratered.”
– Mark Zweig describing why the $2 million he rolled when a private equity group acquired his business went to zero.
