Many business owners are wary of private equity firms. It’s not surprising given the negative light in which the industry has at times been portrayed. But despite the fact that plenty of private equity firms don’t fit the stereotype, this uncertainty still raises a good question for anyone thinking about entering into a private equity partnership: How do you know if you’ve found the right partner?
There are, of course, a myriad of considerations for a business owner before entering into such a partnership. However, the four most important all relate, directly or indirectly, to the people, the men and women, who actually make up a private equity firm.
1. Culture
Culture often plays a huge role in any company, particularly those that are family- or founder-owned. Culture is one of those precious intangibles that’s incredibly important to both owners and employees. For owners, culture is often tied to the company’s legacy. As it relates to employees, a common concern amongst sellers is the future happiness of their employees, who typically worry about ownership changes. Thus, sellers should consider how a private equity partner will (or will not) maintain the culture of their company.
One of the best ways to gauge a firm’s respect for and attitude towards company culture is to look at the culture within the firm itself. A seller will almost certainly visit a potential partner’s office at some point during the transaction process and can learn a lot just by looking around. What is the office atmosphere like? Do the employees seem happy? How are they treated? How does everyone interact? Any firm can say that they respect and appreciate culture, but sellers should look for a firm that walks the talk.
2. Talent
Amidst all the talk of multiples, quality of earnings, adjustments, projections, etc., it’s easy to forget one of the most important things about the value of a company: It’s only as good as the people who run it. Private equity firms vary in their approach to talent. Some are always looking to back an existing management team, while others welcome the opportunity to build out the team. A lot of this can also depend on the needs of the company and the seller’s preferences. However, when a seller is looking for a partner to truly take a business to the next level (as all sellers are when they look to roll proceeds into the PE-backed deal rather than cash out all together), there is almost always a need for more talent. The company should “over-hire”—in other words, hire for where the business is going, not where it is at the time of close.
Furthermore, no matter how great an existing business is, bringing the right people—and the right combination of people—to the table can really move the needle. Accordingly, sellers should look for a firm with a dedicated talent function and a deep network of executives and advisors. Board composition can also be telling (for example, are directors independent or all employees of the PE firm? Are they active? Are they the type of people that could really add value?).