Private Equity Experience

Selling Your Business to Private Equity: The Crucial Steps Before Selling Your Business

• Emily Sander • Season 1 • Episode 4

Share episode

In this episode of PEX, the hosts explore the private equity selling process, comparing it to a dating game to illustrate the stages from initial teasers to detailed due diligence. They cover critical concepts like Confidential Information Memorandums (CIMs), virtual data rooms, and essential legal mechanisms such as drag and tag rights. Additionally, the discussion highlights the challenges founders face when adapting to new roles post-sale and offers practical insights into managing these transitions. Overall, the episode provides valuable guidance for navigating the intersection of entrepreneurship and private equity.

00:34 Host Banter

01:17 Reasons Founders Consider Selling

05:23 Understanding Drag and Tag Rights

12:47 Evaluating Private Equity Partnerships

17:52 Understanding the SIM Process

19:12 The Role of the CEO in Initial Meetings

20:10 Virtual Data Room and CFO Involvement

23:02 Navigating Private Equity Relationships

26:24 Challenges for Founders Post-Sale



Who We Are

If we haven’t met before—Hi! We’re a team of professionals who’ve worked together at multiple companies, seen private equity from all sides, and are here to share what we’ve learned to help you succeed. Ed Barton brings decades of tax and financial strategy experience; Rory Liebhart is a finance and M&A pro with a track record of high-growth exits; and Emily Sander is a former Chief of Staff, multi-time author, podcast host, and founder of Next Level Coaching, helping leaders and organizations accelerate their growth.


Connect with Ed

Connect with Emily

Connect with Rory

Welcome to the Private Equity Experience Podcast. Your backstage pass to the strategies, stories, and secrets that drive value in the PE universe. No filters, no fluff, just straight talk and expert insights to help you navigate the private equity world with confidence. And now your hosts, Ed Barton, Rory Liebhardt, and Emily Sander.

emily-sander_1_11-05-2024_160507:

Welcome back to the private equity experience podcast. How's it going, Rory? How's it going, Ed?

rory-magnolialanepartners-com_1_11-05-2024_160506:

good to be back. Good to be back. Yeah.

emily-sander_1_11-05-2024_160507:

You got some,

ed-barton--lawyer-_1_11-05-2024_160506:

in the neighborhood.

emily-sander_1_11-05-2024_160507:

you got some nifty headphones there, Rory.

rory-magnolialanepartners-com_1_11-05-2024_160506:

well we finally figured out my technical difficulties it seems. After

emily-sander_1_11-05-2024_160507:

But you've gone full circle. Now you're like,

rory-magnolialanepartners-com_1_11-05-2024_160506:

Ha

emily-sander_1_11-05-2024_160507:

sound like you look like one of those NFL announcers who's like ready to go. Yeah,

rory-magnolialanepartners-com_1_11-05-2024_160506:

put me up there with uh, Chris Collinsworth and you know,

emily-sander_1_11-05-2024_160507:

I love him. He's one of my favorite. I cannot stand fricking. Greg Olsen and um, someone, Troy Aikman, Yeah, I don't know. But Chris, yeah, I love him. we're here to talk about,

rory-magnolialanepartners-com_1_11-05-2024_160506:

Yeah.

emily-sander_1_11-05-2024_160507:

um, selling. So why, why would a founder, want to sell?

rory-magnolialanepartners-com_1_11-05-2024_160506:

Yeah. Yeah, absolutely. So ultimately, you know, if you're building a business and you know, you've bootstrapped it or maybe even taken on some, uh, seed investment or angel investment at certain point in time, You know, you've taken your business perhaps as far as you can take it organically. maybe there's some mitigating factors if you were a founder without any successors in your family or something like that. You make the decision of whether it's time to sell and who to sell to.

emily-sander_1_11-05-2024_160507:

Cool. So. What are some of the reasons people could be considering this if you mentioned some of them, but if they're just like retiring, they're just like, I'm, I've done what I need to do here. And now it's time for something else to happen or

ed-barton--lawyer-_1_11-05-2024_160506:

a lot of times, you know, what, where, what I've seen is really, there's, there's a couple key drivers. The biggest key driver is a need to diversify. The most successful entrepreneurs pour their heart, soul, and entire balance sheet into their business. And once that business has gotten stable, and they're doing fairly well, and this is where that, that lifestyle business to private equity, tension comes in, they've done really well, but they've tied up their entire life into their business financially, emotionally, physically. And so they're like, look, I want to take some chips off the table. That's, that's the number

rory-magnolialanepartners-com_1_11-05-2024_160506:

Yeah.

ed-barton--lawyer-_1_11-05-2024_160506:

I see that the number two reason that I see is related to that, which is they and their partners have tied up all their lives and it's almost like a marriage. And every one of those, I've never seen a partnership go for, you know, decades and decades and decades without tension, just like I've never seen a marriage go decades and decades and decades without tension. And when that tension hits, depending on how they work through it, sometimes a need to bring in a third party or fourth party or fifth party to kind of. Settle down the ownership group or to take out the partner. That's like, look, I'm, I'm, I'm done. And it's then they want to ride off into the sunset and you've got another partner who wants to stay and build the business. Those

rory-magnolialanepartners-com_1_11-05-2024_160506:

Yeah.

ed-barton--lawyer-_1_11-05-2024_160506:

tended to be the two drivers outside of I need growth equity capital.

rory-magnolialanepartners-com_1_11-05-2024_160506:

speak. I mean, nothing is permanent, right? So. You're talking about many years of building, building. There's another stage to any business typically. And that's, know, um, selling or liquidating or really taking, as Ed said, some chips off the table.

emily-sander_1_11-05-2024_160507:

Yeah. So like we've worked with several founders and we were, let's talk about the ones we work with together. Like what were the reasons they were initially entertaining private equity?

ed-barton--lawyer-_1_11-05-2024_160506:

Well, if I go back to my first, so not ones where Rory and I first worked together, we had basically angel investors built that business, um, that ranged from former, former, Federal Reserve Board chairman to, uh, you know, kind of local real estate developers. And they wanted, they essentially were like, look, we've been in for 10

rory-magnolialanepartners-com_1_11-05-2024_160506:

Right.

ed-barton--lawyer-_1_11-05-2024_160506:

has gone

rory-magnolialanepartners-com_1_11-05-2024_160506:

Yep.

ed-barton--lawyer-_1_11-05-2024_160506:

We're going to take our money off the table and you need institutional money. So that's was why our first private equity deal got got done was a business had grown to the point where the angels wanted out or the seed investors wanted out and they wanted to be replaced. They wanted to monetize and the founder did not want to exit at that point. So a majority of the business was sold to private equity. Um, and then the subsequent sale there was the founders and the private equity. team weren't getting along.

rory-magnolialanepartners-com_1_11-05-2024_160506:

Right. Yep. Yep. Yeah.

ed-barton--lawyer-_1_11-05-2024_160506:

their value was to sell the entire business. And when I think, you know, they had drag rights, so they basically could force the other shareholders to sell, including the founder that they were like, we want to get out we'll sell our portion, but we actually can make more if we sell the whole business. So they sold the whole business.

emily-sander_1_11-05-2024_160507:

okay. So let's get into drag rights and tag rights. what is that?

ed-barton--lawyer-_1_11-05-2024_160506:

So drag rights are when, and normally it's a private equity guys that put this in the, put this in the, uh, in the deal. it's essentially says, look, if, We go to sell our portion of the business. We can drag you along with us so we can force you to sell at the same terms as we're getting for our sales. So normally it's the drag rights include a, and it's at the same terms or conditions. Again, we've talked about waterfalls. And so, you know, they're, whatever is in that category of the waterfall, they get treated the same, but they're forced to sell. They don't have a choice. Tag rights are when the private equity guys go, we're going to sell our 40 percent or 50 percent or 60 percent and the founder or whoever the other shareholders go, going to sell too. And so we're going to tag onto that sale. And if you're going to sell 60%, you could only sell your proportional interest because we're going to sell our proportional interest as

emily-sander_1_11-05-2024_160507:

So why are drag rights beneficial to the PE firm?

ed-barton--lawyer-_1_11-05-2024_160506:

Because that way they can force a sale of the entire business. And so a buyer is not necessarily stuck with minority shareholders

rory-magnolialanepartners-com_1_11-05-2024_160506:

Yeah. It's

emily-sander_1_11-05-2024_160507:

It's cleaner.

rory-magnolialanepartners-com_1_11-05-2024_160506:

one of those things where, you know, you, you negotiate a deal, uh, and it's.

ed-barton--lawyer-_1_11-05-2024_160506:

ha

rory-magnolialanepartners-com_1_11-05-2024_160506:

litigation not to say that Drag rights aren't litigated. They routinely are but if you have an understanding at the time You acquire a business with from whom you bought it from um You you can avoid that down the road. That's just like any other contractual term You try to get things out on the table and agreed to stuff hits the fan. Um

emily-sander_1_11-05-2024_160507:

Okay. Okay. So it's just cleaner. Like when you're trying to do deals, like it's the whole company is being sold or going with, going with you. Okay. So what's the advantage of tag rights? The opposite direction then.

rory-magnolialanepartners-com_1_11-05-2024_160506:

Well, just as if you're, if you're a, another shareholder, minority shareholder, then you have the opportunity to get in on the same deal that the PE group who's selling perhaps the majority share of their interest in the businesses. And, you know, riding the coattails one way to put it, but, you know. You're, you're, you're basically tagging along to somebody that's got a vested interest in maximizing the value of their deal.

emily-sander_1_11-05-2024_160507:

When would a PE firm want to leave someone behind where someone's like, no tag, I'm tagging on like that's, I want to come with you.

rory-magnolialanepartners-com_1_11-05-2024_160506:

Well, there could be any number of reasons that maybe, maybe it's just time to sell, um, their, their fund, the private equity fund itself. Is, you know, past its prime time to liquidate, um, time to go raise another fund. So, I mean, one of the things we talked about in previous episode and certainly speak a lot to in the book is like the sequential timing of funds. And, you know, that could be one reason. It's just like, Hey, it's time to, it's time to time to liquidate, you know? So, and there's not, unless you have that tag, right. There's nothing that compels the PE group to. the entire company as opposed to their share in the company

emily-sander_1_11-05-2024_160507:

Okay. So that's. Scenario based, which makes sense, but sometimes the P is like, I would rather you just stay behind here and we exit.

rory-magnolialanepartners-com_1_11-05-2024_160506:

I've seen drag rights You know Enforced way more than tag rights I don't hear a lot about tag rights being a thing because usually as you said Emily I mean, there's usually alignment between the selling parties and you're on the same page, but rights is one where I have personally experienced it where that happens

emily-sander_1_11-05-2024_160507:

Okay. So drag and tag rights are terms and conditions that one would include, or I was not trying to have not included in the overall agreement between founders companies and the PE firm. So that's just, that's where that comes into play.

rory-magnolialanepartners-com_1_11-05-2024_160506:

Yeah,

emily-sander_1_11-05-2024_160507:

And then you mentioned the waterfall and we have mentioned that before, but that's super important. So I just wanted to. Make that clear, like the, the, the waterfall is the, how would you describe this? Like the, the sequence or the order at which people get paid out.

ed-barton--lawyer-_1_11-05-2024_160506:

Yep.

emily-sander_1_11-05-2024_160507:

it's very important to know what the waterfall

ed-barton--lawyer-_1_11-05-2024_160506:

a

emily-sander_1_11-05-2024_160507:

is.

ed-barton--lawyer-_1_11-05-2024_160506:

sells, um, or when there's a distribution of cash out of the company, So it may not need to sell, it just may be that there's excess cash to distribute. an order. in which that's done. And normally that starts with senior debt, then mezzanine debt, then preferred, uh, preferred dividends, then preferred stock, then common and option holders are at the bottom. So it essentially says until these folks are paid off and a waterfall is, is all spelled out in the combination of the operating agreement for the, for the company and the deal terms. when you enter into the deal. So you're going to have kind of a couple docs to look at, but it essentially spells out the, for each dollar who gets that dollar. And when they're paid off, then it waterfalls cascades down to the next layer and then they get paid off. Then it cascades down to the next layer until at the very bottom is normally your employee option holders and warrant holders and kind of the. The folks who actually generated a lot of that

emily-sander_1_11-05-2024_160507:

But depending on the source of the waterfall, there could be no water at the end or it could be like a baby trickle.

ed-barton--lawyer-_1_11-05-2024_160506:

Oh

rory-magnolialanepartners-com_1_11-05-2024_160506:

Oh, yeah, that's absolutely true Yeah,

ed-barton--lawyer-_1_11-05-2024_160506:

There was nothing, there wasn't even a trickle, there was nothing.

emily-sander_1_11-05-2024_160507:

Well, and we've been in situations, we won't name names necessarily, but some very savvy founders who said, no, we want to be, uh, preferred, uh, at the preferred level

ed-barton--lawyer-_1_11-05-2024_160506:

Yep.

emily-sander_1_11-05-2024_160507:

what they, what,

ed-barton--lawyer-_1_11-05-2024_160506:

going to, we're going to, if you're investing in our company, we're going to be pari passu. We're going to be exactly the same as you are. So we're going to sit side by side with you on the waterfall. And then at the bottom of the waterfall is going to be the employee options. So

emily-sander_1_11-05-2024_160507:

yeah,

ed-barton--lawyer-_1_11-05-2024_160506:

sat right next to the private equity folks and that, you know,

emily-sander_1_11-05-2024_160507:

but that's not normal though.

ed-barton--lawyer-_1_11-05-2024_160506:

No, that's not. Um, but they

emily-sander_1_11-05-2024_160507:

They knew, they knew about that.

ed-barton--lawyer-_1_11-05-2024_160506:

knew about it and they negotiated

rory-magnolialanepartners-com_1_11-05-2024_160506:

So that kind of speaks back to the, you know, one of the first questions is why, why, why do you sell your business? And I guess I would say one of the things we didn't talk about, we should, is this the simple fact of sometimes a founder is convinced it's time to sell a business. That's what private equity groups do is they go, um, develop relationships. They go, um, search for businesses that are at a certain point in their life cycle. And, you know, they, they, they effectively can tell a story to the founder. And a lot of times it's true, uh, and, and talk about the potential for their business. If they do certain things that may be outside of what the founder, thinks about, you know, or even conceives because, know, they're busy running the business day to day. Maybe, maybe they don't have the vision, um, of the market, maybe that a private equity group does. So, I mean, that's, that's to say that. You know, some of these deals are just like any other deals where, you know, there's two parties coming together having a discussion and they think 1 plus 1 can equal 3 and so they decide to lock arms and do it, you know? Like, it's, that's

emily-sander_1_11-05-2024_160507:

Yeah. Besides the waterfall structure, what should a founder be thinking about when they're evaluating private equity as an option? I mean, we talked about some of the most common reasons, but if someone's, you know, listening and saying, all right, I kind of have a sense of what this thing is, there's a lot of different PE firms out there. I want to make sure it's a good match. Like, how do I, like, what do I look for?

ed-barton--lawyer-_1_11-05-2024_160506:

a, that's like a six episode series. Um, but the, the one I, you know, outside of the economics and, and kind of the, the deal terms and conditions, which are going to be things that you're going to want to negotiate out with any, um, private equity, uh, partner, there's two elements that I think are absolutely critical when you're getting, when you're getting into a deal with private equity team. The first one is, are you really aligned on what the strategy is? not the BS, you know, Yeah, I agree, but I'll just deal with it later. They're never going to kick me out. They're got, you know, well, you really aligned? And then the second piece, and this is, this is almost as important, is think about your hiring as a CEO, your hiring board members. And use some of the same criteria that you would use when you're hiring key

rory-magnolialanepartners-com_1_11-05-2024_160506:

Hmm?

ed-barton--lawyer-_1_11-05-2024_160506:

staff, when you're partnering with your private equity firm. So, are these folks, are they smarter than me? Are they going to add value? Are they going to bring something unique? Are they going to strengthen my management team? Are they folks that I could sit on a plane with for 12 hours and fly to Dubai and not want to, you throttle them the entire way. And if you can answer yes to those things, so you go, look, I'd hire these, these guys for this executive team. And we're aligned on the strategy. You're probably outside of the deal terms. You've probably got those subjective items fairly well

rory-magnolialanepartners-com_1_11-05-2024_160506:

Yeah. I mean, not to be, you know, too simplistic here, but do they understand your business and, you know, talk about alignment on strategy. That's one thing, but really do they understand, you know, the nuts and bolts of the business the way that you do? And maybe the answer is no, and it's still okay. But if it's yes, and you really have that mutual understanding, it can be extremely fruitful partnership, you know? Um, so, know, really getting to know. your suitors are is super important, you know, early on in the process. No doubt about it. You know, a lot of times, just like any other relationship, you'll know pretty quickly. Usually it's not love at first sight, but it's, you'll, you'll know if there's some chemistry there for sure.

emily-sander_1_11-05-2024_160507:

It might be, what was that line in My Fair Lady where it's, I've become accustomed to his face.

rory-magnolialanepartners-com_1_11-05-2024_160506:

Yeah.

ed-barton--lawyer-_1_11-05-2024_160506:

be, it should be a little bit different than that. you know, that, that actually, as you're going through the private equity, as you're going through the, the dating process, the, the, the meetings, you know, the, the, the management

rory-magnolialanepartners-com_1_11-05-2024_160506:

Fireside chats. Yeah.

ed-barton--lawyer-_1_11-05-2024_160506:

all the other happy stuff where you're get, get you utilize your instincts a little bit too. And look if, if. Dealing with the private equity guys is like, it's like, you know, going to the beach and getting sand in your swimsuit but they give you a good deal. You really got to think whether that's a really good deal and whether you can live with those folks for the long haul Because it may it may be that you end up taking a little bit less ideal economic deal to get the right Partnership that'll then drive the business value

rory-magnolialanepartners-com_1_11-05-2024_160506:

Yeah. Mm

ed-barton--lawyer-_1_11-05-2024_160506:

it is it is like a hiring process. It's like a marriage It's like it's like all those relationship things and view those experiences during the lead up to the close, whether it's the initial meetings, the fireside chats, the, the diligence process as, as kind of the dating

rory-magnolialanepartners-com_1_11-05-2024_160506:

hmm.

ed-barton--lawyer-_1_11-05-2024_160506:

And if you, if you're like, F this, these guys are horrible, then, you know, I don't hesitate to rely on your instincts there.

emily-sander_1_11-05-2024_160507:

Okay. So let's play the private equity dating game. The first date is, so there's, well, virtual data room, you've got to build your virtual data room. Okay. Okay.

ed-barton--lawyer-_1_11-05-2024_160506:

way ahead of that. You're ahead of the game already.

emily-sander_1_11-05-2024_160507:

Okay, is that okay? So we're not even to like building our profile because that's kind of like your

ed-barton--lawyer-_1_11-05-2024_160506:

you're kind of building your Tinder profile. So, so, and that's, that's the

rory-magnolialanepartners-com_1_11-05-2024_160506:

You're uploading some pics, you know, maybe a little bio. Yeah.

ed-barton--lawyer-_1_11-05-2024_160506:

you get a, they get a teaser, a teaser will go out like a one page teaser goes out from the, from the, uh, from the investment bank. That's like your Tinder profile.

rory-magnolialanepartners-com_1_11-05-2024_160506:

Hmm.

emily-sander_1_11-05-2024_160507:

put your best picture on there.

ed-barton--lawyer-_1_11-05-2024_160506:

off to like

rory-magnolialanepartners-com_1_11-05-2024_160506:

Yeah, that's you out on a hike. Yeah, exactly, on a sunny day. Yeah.

ed-barton--lawyer-_1_11-05-2024_160506:

left. They're basically going to go, yeah, not interested, not interested, not interested, not interested. But every once in a while, you're going to get to swipe right. And that's the, the job of the investment bankers is to get that out in front of as many people as they can and get it to the right folks. So you get the right people swiping right.

emily-sander_1_11-05-2024_160507:

Okay,

ed-barton--lawyer-_1_11-05-2024_160506:

going to be your teaser.

emily-sander_1_11-05-2024_160507:

so what's the sim? So like what are we talking about? It's CIM

ed-barton--lawyer-_1_11-05-2024_160506:

CIM, confidential information memorandum.

emily-sander_1_11-05-2024_160507:

and that's like a one pager or like

rory-magnolialanepartners-com_1_11-05-2024_160506:

think about when you think

emily-sander_1_11-05-2024_160507:

or a packet. It's like a packet of information. So

rory-magnolialanepartners-com_1_11-05-2024_160506:

on

emily-sander_1_11-05-2024_160507:

we would get sims all the time.

rory-magnolialanepartners-com_1_11-05-2024_160506:

with Ed, you know, before. Yeah.

emily-sander_1_11-05-2024_160507:

100?

rory-magnolialanepartners-com_1_11-05-2024_160506:

Hundreds. Yeah. Yeah. I

emily-sander_1_11-05-2024_160507:

the best ones I see are like

rory-magnolialanepartners-com_1_11-05-2024_160506:

here.

emily-sander_1_11-05-2024_160507:

15 to 50 pages. Like boom, boom, boom, just.

ed-barton--lawyer-_1_11-05-2024_160506:

because that's because we're simple people

emily-sander_1_11-05-2024_160507:

Okay. Okay.

ed-barton--lawyer-_1_11-05-2024_160506:

but no, they, so you got, you basically have this teaser that goes out. And then the SIM is the next piece that goes out. So the people who get the teaser go, yeah, this, these, this, this looks like a nice profile. I'd like to get to know a little bit more. And so they go back to the investment banker and they go, I'm going to sign an NDA and then give me some more. And then the SIM comes out and the SIM has got some financial information. It's got more business information. You may even,

rory-magnolialanepartners-com_1_11-05-2024_160506:

Market analyses, yeah,

ed-barton--lawyer-_1_11-05-2024_160506:

Who, who it is kind of what's kind of what's going on with the business, why they're selling. That's, that's really like the, that's the cyber stalking piece of, of the online dating experience. So now you've started to exchange text messages.

emily-sander_1_11-05-2024_160507:

Well, no, you haven't though. You haven't not, you haven't spoken to the actual company yet. Have you?

ed-barton--lawyer-_1_11-05-2024_160506:

but you're looking at their Instagram. You're,

emily-sander_1_11-05-2024_160507:

So you have like their full profile before you had like the preview page.

rory-magnolialanepartners-com_1_11-05-2024_160506:

yeah.

ed-barton--lawyer-_1_11-05-2024_160506:

checking out their Instagram, you're checking out their Facebook page, you've also got like a friend in the middle, and that's the investment banker that's going,

rory-magnolialanepartners-com_1_11-05-2024_160506:

Mutual friend, yeah, wing person.

emily-sander_1_11-05-2024_160507:

great. They're, you know,

ed-barton--lawyer-_1_11-05-2024_160506:

Uh

emily-sander_1_11-05-2024_160507:

yeah.

ed-barton--lawyer-_1_11-05-2024_160506:

Uh

emily-sander_1_11-05-2024_160507:

Okay. And then if you make it past that stage, then you meet for the first time.

ed-barton--lawyer-_1_11-05-2024_160506:

Fireside chat.

emily-sander_1_11-05-2024_160507:

Iris. I chat.

rory-magnolialanepartners-com_1_11-05-2024_160506:

Typically just the CEO at first, actually, of the operating business. CEO and or founder, yeah.

emily-sander_1_11-05-2024_160507:

Okay.

rory-magnolialanepartners-com_1_11-05-2024_160506:

Because at that

emily-sander_1_11-05-2024_160507:

And.

rory-magnolialanepartners-com_1_11-05-2024_160506:

you may not even, you know, really be, you know, looping a lot of people from the operating business into the tent. Because unless you really think there's a deal to be done, it's You're not going to get people spun up to, you know, take their eye off the ball from a day to day operating perspective. So

emily-sander_1_11-05-2024_160507:

Don't want to distract them.

rory-magnolialanepartners-com_1_11-05-2024_160506:

has been, it's usually the CEO that has those first conversations and that can be a couple of months before even the C CFO knows that there's like actual stuff happening. And that's just the job of the CEO. I'll say as much as anything is, you know, um, sell product and always be selling stock also. Like that's what they do, you know? So,

ed-barton--lawyer-_1_11-05-2024_160506:

Keep, keep raising

rory-magnolialanepartners-com_1_11-05-2024_160506:

yep.

ed-barton--lawyer-_1_11-05-2024_160506:

The virtual data room kind of going back to your one comment, um, the virtual data room, the assembly will start at the time at which that initial teaser is put together, but it continues all the way through the process. And really that virtual data room, it used to be a physical data room. Now it's virtual is handled by the investment banker. So they

rory-magnolialanepartners-com_1_11-05-2024_160506:

Yeah,

ed-barton--lawyer-_1_11-05-2024_160506:

have a, have a setup where they can figure out. who goes in to see stuff, what they look at, and they'll give incrementally more access as you move through the process. so as Rory noted, at some point, normally the CFO gets brought into the tent next after the CEO because they need to fill out the data room. And CFOs tend to have a lot of the information that's

rory-magnolialanepartners-com_1_11-05-2024_160506:

yeah.

ed-barton--lawyer-_1_11-05-2024_160506:

fill that data room

rory-magnolialanepartners-com_1_11-05-2024_160506:

And I will say this, if you are on top of your game, then you will have good corporate hygiene and you'll effectively have much of the information required for a dataroom and some sort of repository on the system anyway. So financial information, contract information, information, all of those things, know, do yourself a favor, even if you're in a business that, you know. Isn't likely to necessarily transact at any specific time, but just Information at your disposal so you don't have to recreate the wheel, you know in a rush or in a disorganized fashion. So oh

emily-sander_1_11-05-2024_160507:

anyway, regardless of if you partner with private equity, but certainly if you do, you're, you're ahead of the game or you're prepared while you're not scrambling, but it's okay. So do a quick recap. You have the teaser. Um, and then you have the sim.

ed-barton--lawyer-_1_11-05-2024_160506:

have the

emily-sander_1_11-05-2024_160507:

then you've got the fireside chat, and then you've got

ed-barton--lawyer-_1_11-05-2024_160506:

access. So

emily-sander_1_11-05-2024_160507:

data room at various levels of access. And so you kind of go through that if you're like full kimono, virtual data room, and you're meeting with the CEO, the CFO, and maybe some other members of the leadership team, that's pretty far down

rory-magnolialanepartners-com_1_11-05-2024_160506:

at

emily-sander_1_11-05-2024_160507:

the path.

rory-magnolialanepartners-com_1_11-05-2024_160506:

That's a great point Emily. That's about where you usually start getting first LOI's You You know, generated by potential buyers through the investment bank and sort of you have typically a handful of effectively offers for your business, whether stock or asset purchase, to, to call through. And that's sort of like where you start to narrow the field of your dating prospects, so to speak, and think about a longterm relationship.

emily-sander_1_11-05-2024_160507:

Oh, man, commitment. Okay.

rory-magnolialanepartners-com_1_11-05-2024_160506:

quite monogamous at this point. It's, um, to continue this analogy, I guess for the rest of the episode. Um, You know, you're

emily-sander_1_11-05-2024_160507:

You actually want multiple.

rory-magnolialanepartners-com_1_11-05-2024_160506:

you know, actively dating with other, other groups and you actually want them to know that too, uh,

ed-barton--lawyer-_1_11-05-2024_160506:

Yeah.

rory-magnolialanepartners-com_1_11-05-2024_160506:

for a lot of reasons. So.

ed-barton--lawyer-_1_11-05-2024_160506:

Yeah. And I'll leave, I'll leave any additional comments about corporate hygiene and any parallels alone for the moment. However, what I will say is a good CFO and Rory had kind of hit on this, a good CFO. knows, especially if you're in or contemplating a private equity type transaction or you're in a private equity relationship, you're going to transact. And so a good CFO is constantly keeping their, their books, records, all those elements that are going into a virtual data room ready. So that like at a moment's notice, they can kind of fire it

rory-magnolialanepartners-com_1_11-05-2024_160506:

Yeah.

ed-barton--lawyer-_1_11-05-2024_160506:

it's not a super heavy lift. And the entire organization then used to that cadence of providing information and loading it. So it also doesn't tip off that all of a sudden there's something new, exciting and

emily-sander_1_11-05-2024_160507:

Yeah.

ed-barton--lawyer-_1_11-05-2024_160506:

because the organization is used to having that cadence of information flow and providing it up to the CEO. And the CFO is always asking for sales pipelines

rory-magnolialanepartners-com_1_11-05-2024_160506:

Mm hmm.

ed-barton--lawyer-_1_11-05-2024_160506:

these

rory-magnolialanepartners-com_1_11-05-2024_160506:

Yeah.

ed-barton--lawyer-_1_11-05-2024_160506:

So Be thinking about that as a, as a chief executive or a chief financial officer. You want to have that cadence, not just during the process, but kind of throughout the process, especially once the process closes and you're now in private equity land, going to transact again, you do not, you know, to go back to the analogy, you will not make for life in private equity and therefore you need to be prepared to, to transact and keep that cadence up, it's much easier that way. And it keeps the, the antenna down for the, uh, employees and they can focus on executing their jobs rather than speculating about what the company's

rory-magnolialanepartners-com_1_11-05-2024_160506:

right. Yeah.

ed-barton--lawyer-_1_11-05-2024_160506:

looks

rory-magnolialanepartners-com_1_11-05-2024_160506:

Yep.

emily-sander_1_11-05-2024_160507:

Okay. So we're running through this process with multiple, hopefully multiple potential buyers. We kind of want to let people know, Hey, like I'm, I'm pretty popular.

rory-magnolialanepartners-com_1_11-05-2024_160506:

hmm.

emily-sander_1_11-05-2024_160507:

I'm hot stuff. I got, I got options here, so you better, you better up your game. And all throughout that process, all those different touch points and phases and stages. You're basically kind of seeing like, do I want to take that 15 hour plane ride with this, with this guy or gal, do I want to, you know, Do business and bring them on the board. Do I want, like, is this someone I can do business with? They're of course sniffing you out as well during that whole process. But that's, that's the like, I don't know, like mating dance that you do when you're hoarding hybrid equity. Okay.

rory-magnolialanepartners-com_1_11-05-2024_160506:

interesting. And, um, know, they're, they're assessing. especially if you're the CEO, sometimes a CFO, founder, like they're, they're assessing, you know, your character, your, um, forthrightness per se. Um, and from their standpoint, can I work with this person? Like, Hey, we, we have big visions for this business, but how obstinate or how open minded are they going to be to accepting You know our expertise in this sector to make this thing massive i. e. one plus one equals three kind of thing it goes both ways even though everybody's very happy and jovial up front. There's a there's absolutely a two way assessment going on personnel wise Yeah,

emily-sander_1_11-05-2024_160507:

you want to be in bed with, so to speak? Also, I mean, if you look at it from their perspective, if you were about to give someone millions of dollars, wouldn't you want to know as much as you can about them? And wouldn't you want to know who you're doing business with? So, it's a fair assessment.

rory-magnolialanepartners-com_1_11-05-2024_160506:

time,

emily-sander_1_11-05-2024_160507:

Um, on

ed-barton--lawyer-_1_11-05-2024_160506:

has

emily-sander_1_11-05-2024_160507:

flip side,

ed-barton--lawyer-_1_11-05-2024_160506:

sign.

emily-sander_1_11-05-2024_160507:

any red flags of here who, here's who should absolutely not partner with private equity? Like

ed-barton--lawyer-_1_11-05-2024_160506:

him.

emily-sander_1_11-05-2024_160507:

these are absolutely no go situations if you have one of these.

rory-magnolialanepartners-com_1_11-05-2024_160506:

Well, if you like, uh having a

ed-barton--lawyer-_1_11-05-2024_160506:

weren't ready

rory-magnolialanepartners-com_1_11-05-2024_160506:

chill

ed-barton--lawyer-_1_11-05-2024_160506:

They needed

rory-magnolialanepartners-com_1_11-05-2024_160506:

hour, 40 hour work week,

ed-barton--lawyer-_1_11-05-2024_160506:

book, but

rory-magnolialanepartners-com_1_11-05-2024_160506:

cash and dividends taking money out of the business.

ed-barton--lawyer-_1_11-05-2024_160506:

was frustrating.

rory-magnolialanepartners-com_1_11-05-2024_160506:

It's probably not right for you. If you like running a balance sheet that's debt free, probably not for you. Um, if you like, if you're not up for, um, sharing control your business that you may have been conceptualizing incubating, running for 20 years, 10, 15 years? That could be a challenge. You know, it could be a to the system if you have new players in the game.

emily-sander_1_11-05-2024_160507:

Yeah. And we've seen that. Shocked us. We've seen someone get like electrocuted in their head and it's not pretty, but they weren't ready for it. They, they were. They needed to read this book, our book, but they weren't ready for it. They didn't understand that. And it was, it was frustrating because being on the leadership team was like, this is just creating drama and churn and everything. But at another level, it's kind of like this poor person who this has been their baby for decades and decades is now having to get used to something totally new.

rory-magnolialanepartners-com_1_11-05-2024_160506:

know, it's amazing. Like,

ed-barton--lawyer-_1_11-05-2024_160506:

of fact, I see that more

rory-magnolialanepartners-com_1_11-05-2024_160506:

yeah.

ed-barton--lawyer-_1_11-05-2024_160506:

not

rory-magnolialanepartners-com_1_11-05-2024_160506:

Agreed.

ed-barton--lawyer-_1_11-05-2024_160506:

at my career and the private equity backed companies that I've been a part of in almost every one of those circumstances, which is one of the reasons why we're gathered here. The founder has been like What the heck just happened now, some of them, uh, and again, I, I've got situations where some of them, the founder goes, okay, I get it. That's fine. That's cool. I'm going to adjust. I'm, I'm making those adjustments. We're bringing in new folks. I'm stepping away, you know, and, and again, we were, we were all part of one where that was kind of the case where the founders got to realize what was going on and they stepped away. Um, yeah. Emily alluded to one that the two of us were at where that was not the case, and it became a very contentious. Um, and Rory and I were in one where it was contentious as well. And I think it's

rory-magnolialanepartners-com_1_11-05-2024_160506:

Yeah.

ed-barton--lawyer-_1_11-05-2024_160506:

you know, that that challenge for the founder is just recognizing, for the most part, it is the control piece. They're used to, has been my baby and I'm in total control. And that's not the case anymore. And, um, Like I said, if you're well aligned on strategy and you guys, and you can communicate well with your private equity partner and you guys get along well, it's going to be like any relationship. There's going to be bumpy times, but you'll, you'll generally be successful. And that's what I, that's what I've seen in my most recent is, you know, that, situation occurred. So even when it got bumpy, they were able to work through it and transition successfully. In other cases, if you go into it, cause you're trying to get the best dollar amount, you may end up with, you know, you're on the outside looking in as the founder because the private equity guys will control that situation. And if you're prepared for that, you know, that's fine, but normally you're not.

rory-magnolialanepartners-com_1_11-05-2024_160506:

Yeah.

emily-sander_1_11-05-2024_160507:

Yeah,

rory-magnolialanepartners-com_1_11-05-2024_160506:

Yeah. That dynamic is just so interesting always because you think about successful founders and sometimes, well, I'd say most times to be successful, you have to be so singularly focused, quite brilliant, and, you know, really used to basically being top down in how you run the business, you are that person and that's what makes you successful. Now, here's that conundrum to say. Well, for whatever reason, I'm deciding it's time to, you know, sell this business. And a lot of, a lot of founders think that they could handle that transition, but until you actually are in it, let's, let's say six months into the post sale phase, Where you're now operating the business under PE ownership, that's when it really starts to sink in. There's a heck of a lot more governance required, there's a heck of a lot more administration,

emily-sander_1_11-05-2024_160507:

yeah

rory-magnolialanepartners-com_1_11-05-2024_160506:

that you might not otherwise have been used to, and you have to find within yourself whether you can handle that or you want to, you know.

emily-sander_1_11-05-2024_160507:

Well, to that point, I mean, at, at about the six month mark, there's, there comes a point where something happens and they basically get told, that's not your call. That's not your decision anymore. And that just can like

rory-magnolialanepartners-com_1_11-05-2024_160506:

a second board

emily-sander_1_11-05-2024_160507:

crumble.

rory-magnolialanepartners-com_1_11-05-2024_160506:

Yeah,

emily-sander_1_11-05-2024_160507:

And that's where someone can literally just dissolve in front of you. And it's kind of a kick in the kick in the pants. Um, and some people recover from that are like, all right. Uh, I understand that. Uh, here's what I always tell executives in this position. You still add value to the business, tremendous value. The way you do that has changed.

rory-magnolialanepartners-com_1_11-05-2024_160506:

great

emily-sander_1_11-05-2024_160507:

And as soon as you can get on board with, with that notion, it's better for you. It's better for everyone around you, but people, man, they fight that and it's hard, it's tough. Um, but I mean, we've also seen people who truly genuinely are trying to make that transition. It's hard for them, but they're trying to, and they eventually get there and it's a good thing. Yeah.

rory-magnolialanepartners-com_1_11-05-2024_160506:

Yeah. I mean, you'd think, and I think a lot of these cases where that, where there is a, um, challenge adapting, you know, the, the founder or the majority shareholder thinks, you know, um, it's all worth it for a lot of money. And then they, they, they get the money, um, you know, call it most of it, some of it's earned out, whatever, but. But it's not enough. It's, it's about more than that to them than they even thought it was going to be. So that's where I think people struggle is to say it. I thought if I made tens of millions of dollars and took chips off the table that I could live with whatever, but I can't either. It's an ego thing or whether it's a control thing or just a misalignment on vision that you're super passionate about for that business. So many human things involved here. Again, after all, this is all human stuff. You know,

ed-barton--lawyer-_1_11-05-2024_160506:

Well, that's the one thing that the most successful and you, you've mentioned it, Rory, the most successful entrepreneurs are all in and they've been all in and their personality is not the normal like, well, I'm going to diversify, I'm risk averse, I'm, you know, they're like, no, I'm all in and I'm going to put all my chips in the middle of the table and keep rolling. That's Where I've seen it, you know, you can hand them and I mean, we were, you and I were in a situation where they handed the founder like 70 million and he was pissed. And he went out and did it

rory-magnolialanepartners-com_1_11-05-2024_160506:

Yeah. Yeah.

ed-barton--lawyer-_1_11-05-2024_160506:

the money. I mean, it was about the money, but it wasn't about the money. It was really about the ability to build and to grow and to do what they wanted to do and to change the kind of change the landscape for that particular industry. And they were driven by, by, You know, again, I think it's even, it's not even ego. It's a, it's a complete, it's like an

rory-magnolialanepartners-com_1_11-05-2024_160506:

Yes. Yeah.

ed-barton--lawyer-_1_11-05-2024_160506:

is that it transcends ego,

rory-magnolialanepartners-com_1_11-05-2024_160506:

Again.

ed-barton--lawyer-_1_11-05-2024_160506:

the

rory-magnolialanepartners-com_1_11-05-2024_160506:

Yeah.

ed-barton--lawyer-_1_11-05-2024_160506:

And you know, that's, and most founders go through that and that's what makes this transition a really, really tough transition for most

rory-magnolialanepartners-com_1_11-05-2024_160506:

Yeah.

emily-sander_1_11-05-2024_160507:

Yes, but that is why it is good that you are listening to the private equity experience podcast, because now you know what you're getting into and you can be armed with good information, which we will have plenty more of in the upcoming episodes, but we will call it a wrap for this one. Thank you, Ed. Thanks, Rory. See you next time.

ed-barton--lawyer-_1_11-05-2024_160506:

Doodles.

If you enjoyed today's episode, please like, share, and subscribe wherever you get your podcasts.