A private equity firm has contacted you. They know your sector, they sound serious, and they may already have a number in mind. The approach is flattering, and it can lead founders to give away leverage before they have assessed the opportunity.
The instinct is usually to ask whether the offer is good. I would begin by understanding what prompted the offer.
The first offer gives you one participant’s view of the opportunity.
First, understand why they called
Private equity firms approach companies for a reason. Something about your business fits an investment thesis. It could be the sector, recurring revenue, a fragmented market, management quality, margin potential, or the opportunity to combine your company with another asset.
Ask enough questions to understand the thesis. What attracted them to your business? Why does the timing work for them? What do they believe the company could become? Are they looking for control, a minority investment, a recapitalization, or a platform for acquisitions?
The answers tell you what value they see. That intelligence remains useful regardless of your eventual decision.
Define your objective before negotiating
A clear objective allows you to evaluate the buyer’s proposal on your own terms.
Work out what you are actually trying to achieve. Do you want complete liquidity or some money off the table? Are you seeking growth capital, a partner for acquisitions, less personal risk, or a path for management succession? Each objective can favor a different deal structure.
You should also understand your hold case. If you do nothing for the next three years, what could the business be worth? What would need to go right? What capital would be required? What risks are you carrying in the meantime?
Get clear on value before discussing price
Founders often anchor on the multiple mentioned in the first conversation. A multiple becomes useful once the underlying earnings, adjustments, growth assumptions, working capital, rollover, earnout, and debt treatment are clear.
A nominally higher valuation can produce a worse personal outcome if too much consideration is deferred, conditional, or rolled into an investment whose future value and risks remain unclear.
Build your own view of value and structure before letting the interested party define both.
Map the alternatives
Even if you like the firm that approached you, ask who else could value the business and why. Strategic buyers may see synergies beyond a financial buyer’s model. Other sponsors may have a different portfolio fit. A lender may allow you to take liquidity while retaining control. An equity investor may finance growth while preserving a later exit.
A bilateral conversation may be the right path. Choose it after considering the credible alternatives and the value of a wider process.
Control the flow of information
Stage the release of detailed financials, customer data, and sensitive operating information. Decide what the buyer needs at each point, protect confidentiality, and prepare the business for the questions that will follow.
A disciplined process keeps a serious conversation orderly while preserving your ability to make a clear decision.
My short version
- Learn why they approached you.
- Define what you want before discussing what they want.
- Build your independent view of value and structure.
- Map the credible alternatives.
- Choose whether to engage bilaterally or create a competitive process.
- Control information and prepare for diligence.
An unsolicited approach can become an excellent outcome. Treat it as the beginning of your analysis and use it to understand the wider market.
Create the market,
Jack