How to Engage With the Right Private Equity Partner

By Greg Morris, Nperspective CFO Principal

Here is the scenario. You started a company or bought a company many years ago, by yourself or with partners. You have used your own money to grow the business slowly. Debt is hard to get, even though the company is doing well. In fact, the company owes you money, and while the company is able to make monthly payments to you from its cash flows, recovering your contributions is also a slow process. You are thankful that in this dreadful economy, the company is doing well, and so you are committed to continuing to grow the company. You also have some great people who have worked alongside of you over the years, who are also committed to growing the company and continuing its success.

Here are your choices:

• Continue as you are which means slowly, very slowly growing and continuing to put your own money into the company for any expansion or development options.

• Raise debt, which is almost impossible, and would have to be paid back out of cash flow.

• Have some other people or companies invest.

• Hire an investment banker who can help you raise private equity money from a private equity firm.

As the CEO and owner or part owner with some partners, the company may be like your baby - you created it and have nurtured it to this stage, and you are probably are not so interested.  However, logically, you know that to take advantage of the tremendous opportunity to grow it even more, some adjustments may be required. So you have to weigh the benefits of keeping this baby completely to yourself, or having outsiders provide some additional growth and nurturing opportunities which will help the baby grow into a well-rounded adult.

Now, you want to find the right partner to help you nurture the baby. Find an investment banker you feel comfortable with and will help you find the best private equity company. Ask friends and business associates who have been through the process before you, it is often best to get a referral. The investment banker doesn't necessarily have to have experience in your industry. Do your research and interview them for the best fit. You are trusting your baby to someone, so make sure it is someone you trust and respect.

Internally, you will have to talk to your partners. There may be some partners that don't want to continue in the business if they don't share your views on future of the company.

You will usually need audited financial statements for the previous three years.  Make sure you have a solid five year business plan for the future including forecasts, budgets, overall strategy, operating strategy and operating tactics for the future. You will have to decide how much of business you want to retain and how much you are willing to give up to make the deal work.

Mentally get ready to know that you no longer own 100 percent of the Company.

The investment banker will walk you through the process and should help prepare you. Listen to the investment banker. The investment banking company will help you prepare a valuation. Get educated about the standard methods of valuation in your industry. Remember, while this is going on you have to keep the business running, and it is very important to continue to achieve or exceed your plan targets.

Now comes the time for the investment banker to find you a private equity firm. Most private equity firms will want 51 percent interest or more. Some will take less than 50 percent.These could be important factors in your strategy for completing a transaction. 

Interview the private equity companies. Do not select a deal partner solely based on the price they will pay. Remember, these are your new partners and you will have to work with them to achieve for goals, and so you should have common views on the future growth opportunities. What is their commitment to your company in terms of money, people and other resources? Will they help you raise debt? Many times the private equity firm will not invest in your company until they have a line of credit in place to support growth. There is usually a recommended or target debt to equity ratio.

Ask the equity firms what they will require from you. An equity firm usually has rules of authorization, which may limit actions you may take on behalf of the company and what actions will require their approval. Also, the equity firm will want a board seat(s), so be prepared for that.

Once you choose a private equity firm, based on advice from your investment banker, the private equity firm will want to go through due diligence. This consists of a detailed review of accounting, legal, operating and other aspects of your business. The private equity firm is interviewing you as much as you interviewed them. They want to make sure they feel confident in your abilities to serve as the CEO and that you are on board with their vision of the future and how best to grow their asset to achieve the targets you have identified together.

Consider hiring a temporary CFO with experience dealing with Private Equity firms to get you through the process. Private equity firms frequently work with temporary CFOs, as their target acquisition companies often do not have the depth of management teams to get to the next level in their growth plans. Nperspective has very experienced CFOs that have been through this process. The equity firm will see your investment in a temporary CFO as a positive indicator that you see the importance of making an initial investment to get the right talent to help you take that next step. Also, the equity firm will most likely have a significant influence in who you hire as a permanent CFO, and your temporary investment allows for the flexibility for you and the equity firm to make this first big decision together, as a team.

Contact us for a free consultation to discuss if there are ways we can help your company succeed. Please contact Janet Watson at (813) 317-3460 or jwatson@npcfo.com.