When private equity (PE) firms acquire baby boomer-owned businesses, the outcomes can vary widely. Not all private equity firms are the same, so it is important that, as a seller, you understand the goals and specific objectives of whomever is planning to buy your company. In numerous studies conducted by the Exit Planning Institute over the past 15 years, one of the common themes that has been reported by sellers after one year post sale, is a sense of regret over the sale of their business. That regret can stem from many sources however several key regrets include belief that they sold for too little, that the buyer has changed their company culture, or that the buyer has done something to the business that has impacted their legacy.
Most of us have heard the term Caveat Emptor (Buyer Beware), however sellers need to be aware of the term Caveat Venditor (Seller Beware). Business owners cannot simply ride along during a buyout, they must themselves complete their own due diligence and be comfortable with the buyer of their business and with what that buyer’s intentions are for the business. While private equity acquisitions can provide liquidity and growth opportunities, there can also be negative consequences for the business, the employees, customers, local economies, and the owner’s legacy. Listed below are ten common concerns or drawbacks that have been identified for private equity takeovers of private companies in North America.
Loss of Company Culture
Baby boomer businesses often have deeply ingrained, family-like cultures. Private equity firms may prioritize profits over preserving these values, leading to employee dissatisfaction and reduced morale. Private equity firms often implement changes to align the acquired company with their performance goal requirements. A study by Bain & Company in the US found that 70% of Private Equity backed CEOs experienced significant cultural changes post-acquisition. While a US based study, similar findings have been reported in Canada as well. The frequency of cultural change tends to correlate with the degree of operational restructuring or strategic shifts initiated by the acquiring firm.
Job Cuts
Private equity firms frequently seek to reduce costs through layoffs or outsourcing. This can destabilize local economies and harm the livelihoods of long-time employees. In a study by the National Bureau of Economic Research (NBER) in the US found that, on average, employment declines by 13% over two years following a private equity acquisition of a company. In private equity owned businesses, job cuts are often part of cost-reduction strategies aimed at improving profitability, especially if the company was previously run with less emphasis on operational efficiency. In many private equity buyouts, the long-term strategy is to grow the company earnings and then resell the businesses: not keep them for the long term.
Excessive Debt Burdens
Private equity acquisitions often involve leveraged buyouts, saddling the acquired company with significant debt. This can limit reinvestment in innovation, growth, and employee benefits. Private equity firms will typically debt-load a purchased business (fund it with as much debt as it can pay for) to maximize investor returns at time of sale. This approach may not be in the best long-term interests of the company or the local community. Piling on debt as part of the purchase strategy can put a tremendous financial burden on a company that could result in failure due to insolvency. As I like to point out to business owners all the time, you can be profitable and still go bankrupt for lack of cash flow – lenders tend to get paid first.
Short-Term Focus
Private equity firms typically aim for a high return on investment within a few years, leading to decisions that prioritize short-term gains over long-term stability. Many private equity firms may not be focused on local community engagement, employee growth or sustainability in any community. Decisions are made that will drive towards the private equity firms mandate and goals which may not align with those of the employees or the community the company resides in.
Erosion of Local Ties
Baby boomer businesses are often deeply embedded in their communities. New ownership may relocate operations, end charitable initiatives, or reduce community involvement. We have seen this over and over in small towns across Canada. When it comes to affecting efficiencies, private equity firms will base decisions on financial metrics, not on emotion or based on maintaining or sustaining local community ties. We have seen cases in Canada where a purchased company was relocated by the buyer under the guise of getting closer to the market or because of trade agreements and/or for tax reasons (subsidies in other jurisdictions, better taxation rules and so on).
Product or Service Degradation
To cut costs and boost profits, private equity firms might reduce product quality or service levels, harming customer satisfaction and brand reputation. Studies suggest that service quality declines in a significant percentage of cases where private equity focuses heavily on cost-cutting. For instance:
• A 2020 Harvard Business Review study found that about 35–40% of private equity acquired companies reported a decline in customer satisfaction within three years post-acquisition.
• Service-intensive industries (e.g., healthcare, retail, hospitality) have been particularly prone to service degradation when taken over by private equity firms.
I will caution that not all Private equity acquisitions result in service declines. In some cases, private equity firms invest in operational improvements that enhance service quality. It is critical that owners do their due diligence when evaluating their purchaser, because not all private equity firms are created equally.
Management Turnover
Founders and long-serving managers may leave after a sale, resulting in a leadership vacuum or misalignment with the company’s original mission and vision. Research indicates that in about 60–80% of private equity acquisitions, owner-managers are replaced with outside leadership within the first 12–24 months. This trend is even higher for companies led by baby boomer owners, as many founders lack experience operating within the high-growth or efficiency-focused environments that private equity firms seek to create. In cases where private equity acquires a minority stake, replacements are less frequent, though leadership roles may still be restructured.
Vendor and Supplier Pressure
Private equity typically purchases companies because they see opportunities for improvement. A consequence of driving improvement may necessitate renegotiation of contracts with vendors to save money, potentially straining relationships with local or long-standing suppliers. A change in ownership for any supplier relationship can be difficult for the parties. Adding layer of both a cost reduction focus and a change in the nature and texture of the relationship between can add stresses to a business that can impact future performance as well as future relationships. Business is all about relationships, not just about efficiency, and injecting a private equity financial performance mandate can (and from my personal experience) can damage supplier relationships irreparably.
Loss of Autonomy
Decisions are often centralized under private equity ownership, limiting the autonomy of the acquired company’s management to make market-specific or employee-friendly choices. Some of the negative consequences of centralized decision making include:
• It can also slow down a company’s ability to respond to market changes or customer needs, especially in fast-moving industries.
• A loss of creativity and risk-taking at the business unit level. When private equity firms impose rigid structures or prioritize short-term financial goals, employees and managers may feel constrained, leading to fewer innovative ideas or initiatives. Furthermore, employees accustomed to a high degree of autonomy may feel demotivated or undervalued when decision-making is restricted. This can lead to turnover, loss of institutional knowledge, and decreased productivity.
• Can lead to one-size-fits-all strategies that ignore regional, cultural, or market-specific nuances, undermining performance in certain areas.
• The top-down, corporate-style management approach imposed by private equity firms can clash with the collaborative or family-like culture of many owner-managed businesses, leading to friction and reduced alignment around company goals.
Risk of Bankruptcy
One of typical private equities key strategies is to minimize personal investment and to leverage debt as the mechanism for payment to the seller. This strategy increases the risk to the company because it is the company that takes o the debt, not the buyers, and the company then is the on the hook to pay that debt, not the buyer. A significant risk of a private equity takeover is the higher potential for failure of the typical private equity firm’s debt funding strategy: increased possibility of insolvency resulting from higher-than-expected interest for debt carrying costs – i.e. debt levels becoming financially unsustainable, ultimately leading to company failure and job loss for employees.
While private equity investments can and have been extremely positive for many companies: they can bring resources and expertise to aging businesses, sometimes with some private equity investors, the aggressive financial strategies and focus on short-term returns often come with significant, and sometimes, negative trade-offs. Baby boomer business owners considering a sale to private equity firms should complete a full due diligence review of buyers hoping to acquire their business, and carefully evaluate the potential consequences for all stakeholders, and how these might impact the legacy that they hoped for.
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