You may have been wondering about Private Equity. But is it right for your company?
When should I look for Private Equity?
If your company is at a turning point, chances are you should be looking into Private Equity. Often it’s because you are growing faster than the bank can fund, a new acquisition opportunity becomes available, or you or your partners need some meaningful liquidity for retirement or estate planning purposes. It is best if you are always looking ahead at least a year or two and don’t wait for an issue to erupt to start looking for financing alternatives. Companies that aren’t doing this can easily grow beyond their management infrastructure, get stretched operationally and then “plateau” or even decline. Owners are then faced with the decision to either sell outright or seek capital in a rushed timetable. The right investment partner can help you meet personal financial goals as well as finance an improved competitive position, attract management talent, and build a stronger balance sheet.
What do I need to get ready?
The quality of your financial records is a major investment criteria so it’s important that you have audited or reviewed statements for the last few years. In addition, you are going to need a business plan detailing your company’s products, customers, management, and also showing a good understanding of your market and competitors. Most business plans also outline the financial projections and the underlying assumptions over a three to five year horizon. Since most middle market companies have limited resources to produce these items, outside resources are often brought in to assist and this process can take more time than owners expect.
Should I use an investment banker?
The right one can be helpful and the wrong one can be worse than useless. Most business owners utilize a wide range of advisors, including lawyers, accountants, consultants, as well as investment bankers to assist in a potential transaction. Investment bankers can be instrumental in leveraging your time by managing an offering process. They can give you an objective assessment of value and structure. To maximize price, investments bankers sometimes run an auction with a large universe of potential buyers. While this process may result in maximizing the price, it can also take more time to accomplish and carry some risk. Many companies have also had success in initiating a limited dialogue directly with one or more likely investors, allowing them to maintain strict confidentiality while “testing the market” on pricing and terms. Sometimes this can quickly lead to an agreement or, at least, provide owners with fresh ideas.
A word of caution should you choose to utilize an investment banker: prior to engagement, verify that your advisor has a referenceable track record in the industry and type of transaction contemplated. Advisors can often pitch deals without relevant credentials, which may end up damaging your company’s prospects and put any transaction at risk.
Do I have to give up control?
No, contrary to the fears of many owners, change of control is not required. Most investors will expect to participate on a Board of Directors with qualified processionals including management. Investors will expect some degree of influence on the Board depending on their level of ownership but major decisions are typically by consensus. The level of investor influence depends upon the investment structure, ownership, amount of capital, and the needs of your business. Each Private Equity firm has differing requirements, which makes finding a cultural fit vital when selecting a private capital partner.
How do I make sure I pick the right partner?
Communication is critical when you are selecting your partner. Before signing a term sheet, make sure you have had several conversations with your prospective partner to align expectations. The investment timeframe, financial projections, Board composition, and Management compensation including bonus and option plans are all topics that should be well understood and agreed upon by both parties. Thoroughly vetting these topics early on will not only minimize future issues, but it will also give you insight about your potential investors. As the discussions unfold, your instincts will generally guide you to the right choice. Consult with the investor’s references to get a sense of their style and culture. Also, don’t be afraid to ask for references on companies that have failed or struggled to perform in order to give you insight on how the investors will behave in difficult situations.
What strings are attached to a Private Equity investment?
Generally, investors will have one or more seats on the Board and must be consulted on major decisions, such as a sale or merger. As a practical matter, management runs the company’s operations and the Board provides strategic oversight. Most decisions thereafter are discussed in a small group at the Board level and are almost always by consensus. The Board of Directors usually convenes quarterly to review the status of the company and any major decisions. Financial reporting is required monthly, quarterly, and annually to keep all parties informed of status of the company and its progress towards its budget and strategic goals.
What benefits/value should I expect after closing?
A good Private Equity partner should bring real value to the Board. With experience and insight in your industry, they are a good sounding board for new ideas and offer a fresh perspective on key decisions. Since they share in the investment returns in your company, they are committed to bringing their capital, talent, and network to augment growth. A good partner can provide a wide network of contacts to source M&A prospects, key executive hires, or new customer introductions. A high quality Private Equity firm will also have a track record with lenders which can substantially improve the pricing and terms of bank debt to finance a company’s working capital growth.