There are literally thousands of potential private equity options for business owners to choose between. Many of the investment professionals are smart, personable, attended great schools, claim to take a "hands-on" approach, and lay on the charm when meeting business owners.
So if a business owner is pursuing a company sale event, how can he/she decide between the multiple different private equity partners trying to win them over?
In this article we offer four different factors to consider to help you proceed with confidence about whether this is the right partner for you.
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Get references of management teams they have worked with. How engaged were they, who attended the meetings, did they understand your industry, how did they behave when things were tough, among other questions. Get to know both the character and track record, both in good times and bad. Consider asking yourself, or have your investment banker dig around with shared contacts.
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Confirm alignment of interest and hold period. Do they want a rapid buy-and-build and flip in 5 years, or offer an indefinite time period? A committed fund has to flip the company to monetize their position, which if you rollover some equity means you will also receive an additional payday down the road. If your PE firm is an independent sponsor backed by family offices, the timeline might be more flexible.
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Can they offer resources and insights beyond just capital? Many experienced PE investors know that simply making an investment in a growing business is not enough. Many investment teams will utilize operating partners who either have industry (i.e. home decor) or functional expertise (i.e. lean manufacturing) as outside board members or advisors, know how to improve ERP systems and reporting, have access to executive search firms or other service providers that can remove bottlenecks and improve outcomes. Even if your industry are niche-y and the firm doesn’t have direct experience there, often times they have situational experience in parallel industries that can be relevant.
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Do you sense a cultural fit. Life is too short to work with people whose company you don’t enjoy. Whether you share interests, are from similar geographies, or simply have great personality fit, these things matter for forming a productive partnership. Take time to build the relationship upfront when things are good, so that you can lean on your partner and/or push back on certain topics down the road with success. If you’re small town Wisconsin manufacturer, you’re right to be skeptical about partnering with a slick-talking NYC firm vs someone else based in the Midwest. The NYC firm might ultimately win you over, but be sure to have your antennas up.
Lastly, trying to ask these questions directly or negotiate terms directly could lead to some awkwardness. Therefore, consider leaning on your sell-side advisor to broach the topics and make the requests of the potential PE buyers. The firms who are serious buyers and proud of their track record will be happy to oblige and open up their network. If they are reluctant to respond, that is telling in itself.
Minnehaha Equity is an experienced long-term investor with 20+ years of partnering with small companies, and happy to share references and discuss why we are the best partner to help your company during its next chapter.