The case for flexible deal structures when acquiring founder-owned businesses

Private equity firms have a proven playbook to buy, transform and sell companies for a profit. This playbook is so effective that today many firms have the privilege of being highly selective in their acquisition targets and deal structures.

This selectivity has created several niche investment areas for more specialized firms (think turnarounds and special situations), but the white whale for many continues to be proprietary transactions, or in other words, acquiring a founder-owned business in a first-time sale.

By purchasing a founder-owned business and applying the private equity playbook for the first time, firms have more room to institutionalize the company and find areas for operational improvement and inorganic growth. However, misalignment between the founder and private equity firm’s vision can often be a nonstarter for otherwise fruitful relationships.

What some private equity firms have realized is that the long-term value of acquiring a founder-led business often justifies a more flexible approach to terms and conditions of the deal. By accommodating the founder’s priorities, these firms not only secure the deal but also position themselves to unlock significant value that might otherwise remain out of reach. Here’s why:

You get an unvarnished look into the business

One advantage of investing in founder-owned businesses is the straightforward nature of the transaction. Without the influence of investment bankers or other third-party negotiators polishing the pitch or inflating expectations, private equity firms get a more authentic view of the business.

The process then becomes a direct conversation between the investor and the founder—two parties discussing the business’s real opportunities, challenges and potential. This transparency allows investors to make well-informed decisions and keep the founder involved and engaged in the process.

Untapped potential for institutionalization

We often hear private equity firms say they like to be the “first institutional funding” a founder-owned business receives.

The raw state of these proprietary businesses provides several opportunities for institutionalization. For example, private equity firms can come in and professionalize the business by identifying and solving mission-critical hiring needs, revamping the sales department to find growth opportunities or putting systems in place to help the business run efficiently.

Related: Rethinking what private equity investment could mean for your business

First-time acquisitions also mean private equity firms don’t need to spend time undoing a prior acquirer’s work. In some cases, differing investment philosophies create policies and procedure that new firms must “walk back,” taking time and money that could be otherwise used on growth and improvement.

Long-term relationships and customer loyalty

Founders frequently build their businesses on long-term relationships, which fosters exceptional customer loyalty. For private equity firms, this loyalty is a key differentiator, as it often translates into a highly engaged and stable customer base. This stability reduces the risk of customer attrition during the transition, a common concern in acquisitions.

The power of the founder’s vision

In a proprietary deal, private equity firms have direct access to the founder and can leverage them for key guidance. In a secondary transaction, the founder may not be as involved, which can make it challenging to connect with them for day-to-day activities and/or planning.

Founders often embody the company’s identity, making their involvement post-acquisition highly valuable for maintaining customer and employee confidence. By incorporating the founder’s insights into customer preferences and behaviors, firms can design strategies that align with customer expectations, ensuring retention and long-term success.

Ultimately, preserving and leveraging customer loyalty to the founder can play a pivotal role in enhancing value from the first acquisition of a founder-owned business.

The takeaway:

Success in acquiring founder-owned businesses often hinges on a private equity firm’s willingness to embrace flexibility in deal structures. While some firms must follow a set guideline when pursuing new deals, rigid adherence can result in missed opportunities to drive real value in proprietary transactions.

By remaining open to preserving the founder’s vision and involving them post-acquisition, firms can unlock authentic insights, institutionalize untapped potential and leverage deep customer loyalty.

To learn more, contact Sean Curley at (336) 217-9125 or sean.curley@charlesaris.com.