I’ve probably written quite a bit already on why an entrepreneur or business owner should consider becoming private equity backed, but I thought it would be helpful to discuss how I think they should go about investigating their options.
- I’d recommend avoiding the intermediaries (brokers, advisers, investment bankers, etc). My reason is that middle-men inherently introduce new layers of costs and complexity and in most instances, a business owner is sophisticated enough to deal directly with potential partners and becoming private equity backed. However, with that said, I fully acknowledge that there are cases where an intermediary can add significant value. Such examples may be where a family estate wants to sell a business, or where the business owner is very technical and hasn’t had to be commercial in their role.
- Talk to the principals of different investment firms to get a feeling for their mandate, intellect, philosophies, but most importantly, make sure they have direct skill and experience in your industry. Also ask their thoughts on being private equity backed. If the firm says they have secondary associations with people in your industry who can help, don’t buy it. Make sure someone on their direct investment team will be able to help extract the most from your business. Even if you just want to sell and get out, most private equity firms will tie you into earn outs and such, so this is still very important.
- When progressing discussions, make sure you understand the firm’s intentions with your business before you commit to private equity backing. That is, ask to see their first draft strategy and gauge the value of it. Use you intuition here and don’t let yourself be bullied. A lot of value can be created with a private equity firm partner, but you want to find the one that can add the most value. Similarly, if the firm’s intentions seem overly risky, then don’t go for it. Your chances of losing value are also much higher with a new business partner.
- Talk to the relevant private equity association, ask their opinions about different firms that are private equity backed and ask to see a list of registered firms and their mandates. This will help to narrow down your initial contact list. In Europe, the applicable body is the European Private Equity & Venture Capital Association, whereas in the States the applicable body is the National Venture Capital Association,
- If you’re given access, talk to the principals of current and past investees of the firm. This is a fair request but one that private equiteers rarely receive. While references may not give you the full picture (people generally do not talk negatively about others), body language and some reading between the lines will give you valuable data points in making your decision. Further, you get another very important data point on transparency if the private equity firm denies your request.
I’m sure there’s much more to think about when approaching private equity firms, but these are a few tips that I hope would provide comfort around the process of being private equity backed.