BloggingStocks Interview: private equity investor/author, Rick Rickertsen

Another company we are looking at is in the foam business. The founder is still leading the company – which he started 40 years ago. The company is the biggest employer in the town and he wants to make sure he has the right buyer.

Besides company visits, I look at a variety of bank proposals for financing deals. I also get pitches from brokers and investment bankers.

There are also calls with management. For example, this afternoon, I have a call with a company where the managers want to invest their own money in the deal. They have some questions about what this means in terms of returns and risks.

Taulli: In your first book, you focused on how you can buy a business. What were some of the main takeaways?

Rickertsen: Usually, it's management that buys the company. And, for the most part, the management has not been significant owners of the business.

But, with the buyout, they now have skin in the game and it makes a big difference for the transformation of the business.

The buyout process, though, can be tricky and that's what my book addresses.

Taulli: What are the key themes of your book on selling your business?

Rickertsen: While entrepreneurs are great at building a business, they often do not do so good a job when selling it. Yet, this is a critically important process.

First of all, it is vital that the entrepreneur get the financials audited. True, this means spending $20,000 or so. But, this can help with the valuation on the deal.

Next, an entrepreneur needs to find ways to diversify the customer base. A buyer does not want to have the risk of a major customer going away.

And, an entrepreneur needs to make himself unimportant. Yes, this sounds counterintuitive, but it is critical. In other words, is the business robust enough to grow without the involvement of the entrepreneur?

An entrepreneur should think about tax planning, as well. Early on, he can start giving part of the business to the heirs. This is what the founder of Wal-Mart did and as a result, his heirs are billionaires.

Taulli: Over the past few years, private equity has surged. Already this year private equity funds have raised over $150 billion. What's driving all this?

Rickertsen: Sarbanes-Oxley, which imposes strict regulations on public companies, is the best friend of private equity firms. Basically, it is now very expensive to be a public company. There are the hard costs for legal and accounting and systems. There are also the costs of management attention. Besides, there is significant personal liability exposure for senior managers.

As a result, instead of going public, companies are deciding to sell out – and this often means selling to a private equity firm. Or, public companies may decide to go private, as seen with Freescale and HCA.

So, I think the trends are positive for private equity going forward. There is enough money to get these deals done. And, there is lots of motivation for managers to sell out.

Tom Taulli is the author of various books, including the Complete M&A Handbook and operates InvestorOffering.com.