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.

Pricing and value creation in private equity-backed buy-and-build strategies

“…Once we compare PE-backed B&B platforms to 1 Further results (not depicted for brevity) suggest that the B&B premium increases if a PE investor faces competitive pressure for deals. This is in line with the predictions in Ahlers et al (2016) who identify PE firm's competitive pressure as being favorable for the vendor owing to relative bargaining power. We also find support for the notion that PE investors pay less in management buyout deals (i.e., including management participation) because incentives between PE investors and management are strongly aligned.…”

“…As a result, platform's management may use its strategic importance as a bargaining chip during buyout negotiations with the PE firm. This creates power asymmetry with the PE investor (Ahlers et al, 2016), and may lead to a seller's market.…”

Sacrifice, Protect, and Hope for the Best: Family Ownership, Turnaround Moves, and Crisis Survival

“…To triangulate, validate, and enrich our findings (see also Denzin, 1970; Miles & Huberman, 1994; Van Maanen, 1979), we complemented our quantitative analysis with additional qualitative interviews ex post, following the example of several recent papers (see, for instance, Ahlers et al, 2016; Bouncken & Kraus, 2013; Carnes et al, 2022). For these “follow-up validation interviews” (Carnes et al, 2022) with key informants (see Ahlers et al, 2016; Bouncken & Kraus, 2013), we conducted four semi-structured interviews with four experienced TAMs in 2021. This also allowed for mitigation of any potential biases that may have occurred in the quantitative data collection, ensuring that the findings and their interpretation were accurate (Graebner, 2009; Nag et al, 2007; Van Maanen, 1979).…”

Family Firm Value in the Acquisition Context: A Signaling Theory Perspective

“…In addition, family firm value in the acquisition context (i.e., the price acquirers pay for targets) may not be the sole result of acquirers’ expectations for a firm’s development; they may also be influenced by other factors, such as the negotiation skills of selling owner families and acquirers (Ahlers et al, 2016; Michel et al, 2020). Hence, we encourage future research to explore how differences in negotiation capabilities of family firm targets and different types of acquirers influence the prices paid for firms in acquisitions (e.g., by controlling for deal experience or putting the research focus on the negotiators).…”