Why Partner with Private Equity
Private equity has certainly been a force for good over the last 30+ years, resulting in remarkable wealth creation for business owners and job creation at the companies they founded. Some companies have trouble with new ownership, to be sure, but the vast majority of cases results in win-win outcomes that would not have occurred otherwise.
First, consider the state of capital markets. If an aging business owner decides he/she wants to transition to retirement and monetize their investment, the choices for liquidity are: a) do nothing and hope it works out, b) give the business to his/her children, c) sell to a strategic buyer, or d) sell to a financial buyer (a/k/a private equity firm). Choices a) and b) will result in considerably less cash for the business owner, and will make estate planning more difficult. Choice c) often times causes disruption between the two operating companies that come together. Choice d) presents the most amount of liquidity, the option of an orderly transition and preservation of legacy, and opportunity to continue earning in the future (if the founder rolls equity into new company).
Second, no two firms are alike. When a business owner is going through a transition, they would be wise to ask the following questions of their potential private equity partner, either overtly or
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.
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.
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.
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.
At Minnehaha Equity, we have worked with lower middle market companies for 20+ years as an investor, advisor, and operator. We have worked in aerospace/defense, automotive, agriculture, semiconductors, pest control, home fragrance, artificial turf, retail signs, sporting goods, among many others, and many different business models. We look forward companies with an existing online marketing presence already, but who is poised for dramatic earnings growth by leveraging our experience with online and AI tools and consultants. Being a value-add co-investor in which founder achieves liquidity, company grows and creates jobs, and new investors earn an acceptable return, is where you see the private equity business model at its best.