Is private equity in your future? Many closely held businesses reach a point where their capital structure is not supportive of their cash and other financing needs. When internal resources and bank money is no longer enough, the business owner and/or CFO has to find outside sources. Seeking outside investment is not, however, an easy process. The search needs to resemble a courting relationship that used to be so common in interpersonal relationships. You are, after all, seeking to build a long-term partnership.
Inc. online has a column entitled Herding Gazelles. In a post today, Karl Stark & Bill Stewart point out what to look for in private equity investors:
1. Find the right investor.
Angel investors, venture capital funds and large corporations all have different investment profiles. Each has a specific motivation and a process they typically use to create value. Partnering with the wrong investor often means that your business will be asked to meet investor goals that may not align with your goals for the business. Find an investor whose objectives are in sync with the business you are building.
2. Agree to a common view on how to maximize value.
At the outset of your partnership, spend time to align on the facts around the business and its markets, then discuss your strategy and how it will maximize value for the business. Make sure both parties are clear on the roles they will play and the expectations for how the investors will participate and add value to the business. A successful relationship is all about setting and communicating the right expectations and engaging in open communication when events necessitate a change in those expectations.
3. Align on the right incentives and desired outcomes for both parties.
Clearly lay out the personal, professional, and financial goals for both you and your investor. Identify areas where you can work together to help each other reach his or her individual goals. The investor will likely have a specific timeline in mind for an exit and may have expectations about an exit price. This will have a large impact on their view of various strategic decisions. As a CEO and management team, you may also have specific expectations about how to grow the business. Put these all on the table, especially if they may be in conflict, so you can manage expectations upfront and amicably.
4. Leverage your investor’s experience, not just their money.
Brainstorm with your investor about ways in which he or she might help push the business forward. In some instances this may be obvious, such as a partnership with a corporate entity, but you may be surprised at other things the investor can offer beyond financial support. Investors typically have seen successes and failures and can share their advice. They may have a wealth of contacts, even potential customer relationships, that could provide value to the business. Don’t overlook these intangibles.
A private equity investor will be a key member of your management team, so you need to build a strong, lasting relationship with them-just as you would with any of your key team members. Using your investor to the fullest will be critical to fueling the growth of your business.
Following these guidelines is just good common sense. We would add to the suggestions that it is important to identify “fit” before anything is on the line. Discussing how decisions will be made, what outside professional services firms will be used, and how the composition of boards of directors and advisors ahead of time is a good way to learn about the investor’s priorities and values. While agreeing on how to maximize value is important, it is even more important to identify what metrics represent value. Great advice on leveraging an investor’s experience–ask what they plan to bring to the partnership beyond money. You may be very pleasantly surprised!