Advice for Companies Considering Private Equity Investment

If you are a business executive considering seeking private equity investment, partnering with a PE group can be a great option to improve your operations and drive growth. In addition to the capital they provide and the opportunity to take some “chips” off the table, PE groups can bring new ideas, additional resources, and experience that many established founder/family-owned business don’t have.?

As a company, Chief Outsiders has worked with over 150 PE groups with investments across just about every industry and sector, and we have seen firsthand how PE groups operate and the tremendous value they can bring to businesses.

If you are considering partnering with a PE group, here are a few things to keep in mind:

1.??????Define your goals

Before you start talking to PE groups, it’s important to have a clear understanding of your goals. What do you want to achieve by partnering with a PE group? What are your business’s key areas of focus? Having a clear understanding of your goals will help you find the right PE group to partner with. It will also make it easier to communicate your goals to potential partners and get them on board with your vision.

It's also important to think about what value a PE group can bring to your business.?Other than cashing out, will the capital they provide help you invest in the business in ways you could not do on your own??Investments can include everything from capital investments in equipment and machinery, to sales and marketing, to market expansion (both to new geographies and new customer segments), and acquisitions to expand the platform.?Think carefully about the areas in which a PE group investor can accelerate your goals or take you to new places vs. your ability to get there on your own.

2.??????Do your research.

There are a lot of PE groups out there, but they are not all created equal. That doesn’t make any of them bad people or bad companies, it means that not every PE group may be the best fit for you and your business. To ensure the best match, it’s important to do your research and to understand your options.?When you are evaluating potential PE group investors, here are a few things to look for:

• Experience: What types of businesses have they invested in? Do they tend to specialize in certain types of businesses or are they more generalist??How much experience do they have in your industry and with companies with similar business characteristics (size, growth-stage, etc.)??Are they founder/family-owned or are they investing in companies that have gone through a PE investment cycle previously?
• PE Group Structure: How big is the PE group and what capabilities do they have to provide additional investments into your business??What does the team look like that would be working with you – are they all investors or do they have subject matter experts who can provide specialized expertise? Do they tend to invest alone, or will they bring other investors into the mix?
• Culture: What is the culture of the PE group? Do their values align with your own? How committed are they to keeping what’s important about your business culture and values intact (it helps if you’ve articulated them for yourself)?
• References: Do they have good references from other businesses they have invested in??Have you talked with others who have gone through an investment cycle with them – not just people in their current portfolio but executives who have gone through a complete cycle including exit to understand what they were like throughout the process.

3.??????Understand the process

While there may be some variation, most private equity deals follow a familiar process.?This typically includes:

• Indication of Interest (IOI) and/or initial discussions with you, your management team, and your banker (if you are using one).
• The execution of a Non-Disclosure Agreement (NDA) before any sensitive information is shared.
• Letter of Intent (LOI) from potential buyers with serious interest in a transaction laying out the basic terms of the proposed deal including potential price, financing, and other key terms.
• Due Diligence which will consist of a thorough review of the details of your company’s financials, operations, customer lists, and other critical areas related to how the company operates and makes money. The due diligence process can be daunting and extensive.?It can also take a lot of time to prepare the information for review by the PE group and to answer additional questions.?A well-organized data room is critical for a smooth due diligence process, and it’ helpful to prepare as much as possible early in the process. Your banker can help you prepare.
• Negotiation over the final pricing and terms after adjustments based on findings from the due diligence process.
• Financing and closing after all the terms have been agreed to and when financing is secured, money exchanged, and paperwork signed.

4.??????Ensure you’re aligned

Understand the PE group’s investment thesis (why they are investing in your business and how they expect to monetize that investment) and make sure you agree with their thesis and value creation plan.?While a PE group can bring multiple experts and resources to the table along with capital, they won’t know your business as well as you do.?Presuming you are continuing on with the business post close, it’s important to be on board with the PE group’s value creation approach and plans for growth and financial engineering.

5.??????Understand how PE groups make money

It's important to remember that many private equity professionals are not necessarily entrepreneurs or business managers or operational executives.?They are asset managers responsible for providing returns to their investors.?Their primary purpose is not to build great long-term companies - it’s to get the highest return on invested capital in the shortest period of time.?To be fair, they are also human beings, and most are interested in doing the right things by the people and the companies they invest in - as long as that does not get in the way of their primary purpose.?Many PE groups play a critical role in the evolution of companies through the different stages of growth.

In summary, partnering with a PE group can be a great way to improve your operations and drive growth. However, it's crucial to do your homework, find a good match for your business and goals, and understand the PE group's investment thesis and approach. The private equity deal process can be daunting, but with preparation and the right guidance, it can be a smooth and successful journey for you and your business.