Opening the Black Box: Power in Buyout Negotiations and the Moderating Role of Private Equity Specialization

Abstract

The management buyout is an important exit strategy for small business owners. Negotiations of buyout deals have received little research attention to date. This is surprising given buyout negotiations' complexity giving rise to multiple issues that require consideration and often conflicting interests of deal parties. This paper examines perceived bargaining power in buyout negotiations between private equity (PE) firms and current owners who sell their business. We identify competition, expertise, and time pressure as key antecedents of PE firms’ perceived bargaining power and examine the moderating effect of PE firms' industry and size specialization in buyout negotiations. We use a sample of 176 respondents who each report on a particular buyout deal for a PE firm. The majority of respondents are seasoned PE professionals who held managing director or investment director positions.

Notes

1. According to this worldwide PWC survey, ∼1,600 (family business) owners and managers assume the following exit routes for their business: 53 percent family succession, 35 percent buyouts (management and financial investors), 21 percent trade sale, 8 percent IPO, and 13 percent other. Please note: Numbers do not add up to 100 percent as multiple answers were possible.

2 This excludes cases of secondary buyouts when the seller can also be a PE firm.

3 Anonymized.

Additional information

Notes on contributors

Oliver Ahlers

Oliver Ahlers is a Visiting Researcher in the Witten Institute for Family Business (WIFU) at Witten/Herdecke University.

Andreas Hack

Andreas Hack is professor at the Institute of Organization and Human Resource Management, University of Berne, Switzerland, and affiliated professor at the Witten Institute for Family Business (WIFU), University Witten/Herdecke, Germany.

Franz Kellermanns

Franz Kellermanns is a professor of management at the University of North Carolina – Charlotte and affiliated with WHU (Otto Beisheim School of Management).

Mike Wright

Mike Wright is professor of Entrepreneurship at Imperial College Business School and visiting professor at University of Ghent.