3. Character
Anyone who has partnered with a private equity firm will attest that it’s like a marriage. And it’s true: the parties are legally bound, spend a lot of time together and will inevitably have disagreements. Sellers should evaluate a potential private equity partner in this light, looking for a firm made up of genuinely good, reasonable people who are willing to have open and honest discussions. This is particularly important when a seller is giving up majority ownership.
While it may seem obvious that sellers should seek good and honest partners, it’s easier said than done. Character can be difficult to assess, especially in a formal process, but there are things that can shed some light. As mentioned above, sellers will have an opportunity to visit the offices of potential partner firms, and the questions related to culture will provide some insight. Another great tool? References. Conversations between sellers and former or current founder-partners can be incredibly valuable.
4. Price
Last but not least, sellers should (and obviously will) consider price. What does this have to do with people? A lot, actually. All private equity firms are going to use certain benchmarks to determine valuation ranges and then subsequently adjust those ranges based on a variety of factors. As the process moves along and the list of potential private equity partners gets narrowed down, valuations will vary less and less. This is where people make the difference.
Because initial bids aren’t binding, there’s nothing stopping a firm from putting in a bid with a markedly above-market valuation and then re-trading further along in the process. Sellers should look for firms who are honest and upfront about their valuations and won’t throw out ridiculous bids just to get to the next round. (This ties in with the character considerations above.)
Another important consideration is a future transaction, the so-called “second bite of the apple.” When a seller maintains equity in the business post-transaction, it’s quite possible that the second bite will be worth more than a turn or two in the initial deal. The highest bidder isn’t necessarily the best partner for the long game.
Moreover, the same sentiment mentioned earlier, that a company is only as good as its people, applies to private equity firms, too. A firm is only as good as the people within it. Lots of things can happen throughout the life of an investment, and there will inevitably be bumps in the road. Even the best businesses are impacted by external factors at some point. It’s easy to be a good partner when things are great. What sellers really want is a partner who will be supportive when the going gets tough, which will make celebrating success that much sweeter.
Whitney Krutulis is the director of business development at Sterling Partners.