Seven things to expect when selling your LSP to private equity

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Txema Clifford Content & Analytics, Digital, M&A...

Many language agencies are turning to ready PE capital to support growth – what impact will it have on your business?

Private equity funding continues to make steady advances into the language services domain, with an increasing number of LSPs leveraging investor capital and expertise to springboard their agencies to the next level of growth (Frontier Capital’s exit of IP translation specialist MultiLing is the latest public success story).

Unlike sale to a trade buyer, however, selling to a PE firm rarely involves an immediate exit from the business and is likely to be a two-stage process that calls for significant ongoing involvement from the owner.

PE companies typically look to acquire a controlling or majority share of the business they are investing in, and work to provide resources that enable the company to pursue market opportunity that was previously out of reach.

When things go positively, PE investment can mean phenomenal results for business owners – but it’s a special type of partnership that has to be carefully constructed.

As an LSP owner considering growth options, what should you expect if you partner with a private equity group?

1. More money to grow

The primary asset that PE groups bring to the table is deep pockets that let business owners accelerate their growth trajectory and increase shareholder value. This may take the form of investment in sales, marketing or technology, or may – as is the case with LanguageWire’s recent acquisition of Xplanation – include expansion through M&A.

Be ready, however, to justify every penny. PE partners aren’t spending out of their own personal piggybanks, but are beholden to investors in a fund which provides the capital used for their projects. So while a PE partner may offer access to big sums for investment in growth, the ROI of each decision will be carefully scrutinized to calculate the anticipated return.

2. No place to hide

Just as investment decisions will be analyzed in detail, so will every aspect of business operations. Costs, personnel, customer base – even the performance of the incumbent CEO.

Some business owners thrive on this new pressure to deliver results, as privately-owned companies often lack a driving force to spur on aggressive growth beyond the personal ambition of the founder.

A new group of motivated shareholders certainly provides this impetus, but business owners need to enter the deal with their eyes open and understand that the PE group’s primary objective is to deliver the best possible return on their investment. When faced with obstacles or indicators that they are falling short of forecasts, they won’t hesitate to act. In worst-case scenarios, this can mean layoffs, office closures or other big changes which can impact and potentially damage company culture.

3. A new business partner

Often among the biggest adjustments business owners have to make in selling to PE groups is no longer being in full control of their organization. For founders who have run companies for ten or twenty years, to be bumped down to a minority partner can feel strange, even if the upside potential this creates is greater than anything they could have achieved independently (as is often the case).

In real terms, accessing that upside means no more solo decision-making and needing to get along well with a new group of senior business partners. This doesn’t mean, however, that PE firms will be getting under the wheels of management on a daily basis – they are investors, not operators, and though they add experience, financial expertise and ideas, they will not be involved in daily functions and will leave management to do its job.

4. An easier sale process

‘Easy’ is a relative term in all cases, but there’s truth in the idea that selling to private equity groups can be a more straightforward process than selling to a trade or strategic buyer. PE groups have a mandate to acquire companies, often within a fixed time period (the expiration lifetime of the fund), and need to buy, grow and exit companies within that span in order to provide investor returns.

As funds are spread across a portfolio of investments, PE groups accept a certain degree of risk in their work, also.

With other buyer categories (for example private sale), it’s likely that a large percentage of the buyer’s personal net worth may be invested in the deal, or that they have a realistic option to simply pull out of the idea of making an acquisition altogether. This can lead to a slower, more ponderous process (often less well structured), which can be draining for the seller and a distraction for the business, especially if it doesn’t result in a deal.

5. A new perspective

As mentioned, PE groups are not ‘operators’ who will be working actively inside the companies they acquire. In fact, many PE partners have never done anything even resembling the type of work which founders (or 99% of their employees) do on a day-to-day basis.

Instead, they bring a different set of skills. Often armed with MBAs and the holders of multiple advanced business and financial certifications, PE professionals are seldom entrepreneurs and perhaps more accurately labelled professional investors.

While they may not join you in putting their shoulders to the wheel, they will be highly adept at studying business data, finances and performance reports, spotting opportunities for efficiencies, expansion and guiding where investment capital should best be deployed.

In the best partnerships, the analytical skills of the PE team coupled with the market knowledge of management creates a powerful team.

6. A fixed exit timeline

A significant degree of control that founders give up when selling to PE firms is the ability to dictate time-frames when it comes to exiting the company fully.

Although a business owner already takes some chips off the table when selling their initial share to the PE firm to begin with, they are usually then locked in to executing on a growth and exit strategy which will enable the PE to deliver returns to fund investors.

With most funds having a life-cycle of 5 to 7 years, this arrangement strips founders of the flexibility to run their companies for a long (or as little) as they wish, as the PE firm will look to sell their investment on for a profit during that window.

7. A new set of stakeholders

On an emotional level, some founders take some time to get used to the idea that their company - often built up with sweat, grit, late nights and plenty of risky moments – has become a vehicle for investment in a larger series of business partnerships. PE groups create their funds with money from wealthy individuals, pension plans, insurance companies and other investors looking to generate a return on their capital, and knowing that these unknown parties are ultimately the ones driving the decision-making within a business can be hard to process.

With that said, many founders are able to retain significant degrees of both cultural and creative control of their companies after selling to PE partners, and think of outside investor involvement as simply fuel to power their growth of their company. While they may no longer own a controlling share, they remain the de facto business leader and can achieve personal wealth by leveraging investor funds that far exceeds anything attainable on their own.

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Adaptive M&A works with the owners of translation and localization agencies to maximize shareholder value at exit by identifying the right strategic match from a diverse network of buyers and investors.

You can learn more about our services here.

Please feel free to contact me at txema.clifford@adaptive-ma.com if you require assistance on the above.