The plusses of selling a business to private equity.

• Author: Lobel, David
• Position: Private companies - Small business owner partnership with a private equity firm

Would it surprise you to learn that 85 percent of small-business owners have no succession plans? If you're a business owner, presumably with the majority of your personal equity tied up in your business, do you know what your company is worth?

Sixty-five percent of owners don't. Combined, these two statistics put the approximately 12 million baby boomers who own and operate private companies in the U.S. in a particularly precarious situation--everyone, after all, must retire eventually. This year, the first wave of "boomers" will reach the average retirement age of 62 at a rate of roughly one every eight seconds. So, what will become of these businesses and their owners? After surveying the options, many owner may be persuaded to consider the advantages offered by private equity.

Options, and Challenges

A small business seller has several options, each with its own challenges. The expense and burden of an initial public offering (IPO) can be overwhelming. Another option is a strategic sale to a competitor, where business synergies might produce a premium price. Strategic buyers can be slow-moving, however, and if it doesn't work out, the owner might have exposed proprietary elements of his or her company to a competitor.

The advantages of selling to a private equity firm begin with flexibility. Owners of closely held businesses have different issues and agendas and different plans for transitioning out of the business. Some want to fully retire all at once, while others prefer to stay actively involved for a period, perhaps in a scaled-back role. Some have a clear successor as CEO; others welcome help in locating future leadership.

Private equity transactions, due to their non-public nature, allow for maximum discretion. This will appeal to some owners--those, for example, who'd prefer that the local community not learn about the extent of their wealth.

Another defining characteristic of private equity is alignment of interests. In a private equity-owned business, the interests of management and its sponsors are likely to be closely aligned. In most cases, the management team will take a significant equity stake. Private equity firms have proven they can attract top-notch executives by designing compensation plans that enable the entire management team to build significant personal wealth, provided they create substantial shareholder value.

Private equity firms can also bring an infusion of perspective. Some firms specialize in specific...