Barbarians at the Gate – What to do if you’ve been approached by Private Equity

Private Equity

Private Equity Approaches

Congratulations you’ve managed to attract the attention of some investors. This could be the exit that you were hoping for. The big pay day that makes those years of hard work justified. You can sense the finish line is close, but before you start training for the Seniors Pro Surfing Tour …  you’ve still got a job to do. Here’s a quick checklist:

RUN A CAPITAL RAISING PROCESS

Think about alternatives. PE firms will look to wrap you up in terms of exclusivity before they engage and incur costs. The terms of this exclusivity can be very onerous and reasonably lengthy in nature. So, before you sign, have a think about what some of the alternatives could be. Are they the only party who could be interested in your business ? Is it worthwhile making a few quick calls/meetings to see if there would be anyone else interested. A PE fund will always resist a competitive process for the same reasons that you should always try to create one.

VET THE PRIVATE EQUITY/ INVESTOR

Character check the PE fund. Who are these guys? What is their track record? What other deals have they done? PE funds will talk a lot about their successes but infrequently about their failures. It is important to speak with someone who has dealt with these guys before.

RELEASE INFORMATION INTELLIGENTLY

Don’t pull back all the covers. By allowing a private equity fund to lift the hood on your business you may be giving away more than you think. PE funds’ investment thesis is to get comfortable with the sector and then look to do a Buy & Build strategy whereby they buy a base business and then look to acquire lots of players. Therefore, there is every chance that they are associated with one of your competitors (or will soon be). Identification of commercially sensitive matters and ensuring that that information is gated and only made available at the very last possible moment is critical to reducing the risk of them using this process as a means of understanding who you are and what your key contracts are before withdrawing from the process and directly competing with you from a very strong information advantage.

PROTECT YOUR KEY TEAM MEMBERS

Understand how your staff will react. An approach like this creates uncertainty among staff. Being on the front foot with clear communication and explaining what is occurring and what the timeline for an eventual decision is essential to ensuring your business doesn’t get damaged during the negotiation/diligence period. This is particularly so if the PE approach is assumed to create large job losses. Your best staff may seek to pre-emptively leave which will, at best, reduce your negotiating position with the PE and at worst damage your company in the long term and spook the investor away. Sitting down with key staff and explaining your thought process including what happens if/when the PE comes on board is essential to retaining this staff. In some cases, there can be room for promotion or pay rises for key positions as well as exposure to a more experienced board which can help their long-term career prospects.

HIRE A CORPORATE ADVISOR, A GOOD ONE

Finally – get some help. This is too important a time not to have someone who has done hundreds of these negotiations in your corner. The cost of this advice will always be very reasonable relative to the value that they can add. However, do your research. At Neu Capital, we have spoken to over 70 corporate advisors across Australian and New Zealand. Most are great operators but from time to time you do come across advisors that are good sales people but don’t have the experience to fully understand your opportunity. Ask for deals they have completed that are relevant to your opportunity. Instead of asking for referrals, pick a couple of those deals on their website or that they have shown you and ask to speak to the execs in those companies about their experience.

Like the saying goes, it’s easier to divorce a spouse than get rid of a shareholder. Bringing in a third-party investor is a major decision, one of the biggest your business will ever make. It’s not a time for hurried decisions.

Check out the video below looking at the global private equity outlook for 2017 and beyond. If you’re more of a reader, here’s a link to the Bain & Company Global Private Equity Report 2017.

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