Who is the king of the hill? On bargaining power in private equity buyouts

Abstract

Advancing the literature on Private Equity (PE) buyout negotiations and family-business decision making, we theorize and empirically confirm that sources of bargaining power (i.e., PE expertise advantage and seller's time pressure) interact differently with perceived PE bargaining power, depending upon whether the seller is a family or a non-family business. Additionally, we demonstrate that, for family businesses with an increased family team complexity, the effect of bidder competition becomes weaker, whereas the relationship of PE expertise advantage on PE bargaining power becomes stronger. Hence, team complexity reduces a family business' decision power and increases a PE's comparative bargaining advantages. These findings contribute to several research streams: first, to that of family businesses by advancing knowledge on heterogeneity, operationalized as team complexity, that negatively affects a family business' bargaining power; second, to that on PE buyouts, with a finding that a PE firm's bargaining power differs significantly depending upon the type of seller (family vs. non-family business) due to a family business' unique socio-emotional wealth considerations; and third, to the general strategic management literature on upper echelons and top-management teams (TMT), with a finding that team complexity reduces the family business teams' behavioral integration and hence its ability to use potential bargaining advantages.