InSight

Exit and Growth Strategies for Middle Market Businesses

The Buyout – For Business Owners to Exit Their Business

By David Sinyard | Aug 15, 2016

business owners to exit their businessThe buyout is an important route for small and medium size business owners to exit their business and could be particularly relevant for family firms who find no successor inside the family.  According to a recent survey, it is estimated that around 35 percent of businesses globally consider ownership succession through a buyout (PWC 2011). One of the primary sources of capital for such buy-outs comes from Private Equity (PE) firms.

An interesting academic article has recently been published in the Journal of Small Business Management 2016 by Ahlers, Hack, Kellermanns, and Wright that focuses on perceived bargaining power in buyout negotiations between PE firms and current owners who sell their business.  They looked at competition, expertise, and time pressure as key elements of PE firms’ perceived bargaining power.  Their research indicates that PE firms experience high perceived bargaining power in buyout negotiations, depending on factors such as competition, expertise advantage, and seller’s time pressure.  Higher competition between potential buyers lowers the PE firm’s perceived negotiating power.  Expertise as it relates in particular to valuation, synergies, and process-related aspects of buyout deals would seem to provide the PE firm with more perceived bargaining power, particularly as it relates to valuation.  If the seller in buyout deals suffers from time pressure, PE firms may gain higher levels of perceived bargaining power.

Clearly sellers need to be aware of these perceptions of stronger bargaining power.  The process must be run so as to balance the bargaining positions of both seller and buyer.

Posted by David Sinyard.

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