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How to Choose a Private Equity Firm

If you’re looking to take on an outside investment for your business or startup, you’re probably feeling overwhelmed, stressed, confused, and even a little anxious.

You know an infusion of capital will serve you well, but you’re nervous about how to select the right firm or partner.

And at the end of the day, you’re left asking one simple question:

How do I choose the right private equity firm?

What to Look for in a Private Equity Partner

You don’t have to be a seasoned entrepreneur or experienced founder to know how important it is to select the right private equity partner for selling your business.

We’ve all heard horror stories of bringing on a partner who doesn’t fit the culture or plan. You’ve seen businesses fall apart because of incongruence between an equity partner’s objectives and the founder’s objectives. It happens all the time.

graph of private equity firm growth
Funds held by existing and new private equity firms continues to grow.

Most private equity investments are at least three to five year “marriages” that require careful and consistent cooperation before the relationship can be exited. So it’s not uncommon to find yourself stressing over issues like:

  • How involved will the investor be in day-to-day operations?
  • Will I be able to maintain control?
  • Does the equity partner bring anything other than capital to the table?
  • Will this partnership rock the boat and compromise the culture we’ve built?
  • Will having an outside voice be good or bad for the company?

We’re not going to pretend like finding and partnering with a private equity firm is always smooth sailing. However, certain partnerships are much smoother than others. It ultimately comes down to what you look for and prioritize in a private equity relationship.

With all of that being said, let’s dig in and get clear on what you should be looking for in a private equity partner so that you always find a match made in heaven.

1. Management Style

It’s always good to begin an evaluation of a private equity firm by analyzing its management style. Depending on your experience level as an entrepreneur, the state of your business, and your specific needs, you may want a hands-on firm or a passive firm.

With a hands-on firm, you can expect a certain style of management. This typically involves:

  • More demanding reporting and regular audits and reviews
  • Active role in decision-making (including day-to-day operations)
  • Onboarding new employees and managers who may replace some existing staff

With a passive firm, you get a totally different flavor. You can expect things like:

  • More listening and less directing
  • Little-to-no daily management
  • Serves as a system of checks and balances, rather than a directive force

Some companies are in desperate need of a hands-on private equity firm that can take the reins and provide guidance and leadership. Other companies would quickly become fragmented and toxic if a hands-on partner entered the picture. It’s up to you to determine your specific needs.

2. Overall Strategy

As you evaluate potential private equity partners, think carefully about the strategy they’ll deploy with your business. Once again, there are two overarching methods that most of these firms use.

The first strategy is known as a “playbook-focused” approach. With this strategy, the company already has a playbook that it uses to manage businesses regardless of niche, market, or vertical. They come in and make sweeping changes based on a predetermined checklist. This leads to faster innovation and lower costs, though it can sometimes miss the mark in areas where details matter.

The second strategy is a “bespoke” approach that uses a custom-built strategy that’s carefully tailored to your individual business. This method usually takes longer to implement and deploy, but can work in ways that the generic playbook strategy doesn’t.

You can think of it like a collection of pegs and holes (where your business needs are the holes and the private equity firm’s investing strategies are the pegs). With a playbook approach, the firm is constantly resizing and shaping your holes so that their pegs fit. With a bespoke approach, the firm changes its pegs to fit your holes.

3. Resources

Just because a private equity firm is interested in investing in your business, doesn’t necessarily mean they have the right resources to offer your business outside of capital. It’s important that you carefully consider what your needs are and investigate whether they can fill those gaps.

For example, do you need more partnerships with companies to build out your supply chain? It would make sense to find a firm that can help you establish these relationships. Or do you need to improve customer experience in your brick and mortar stores? Make sure you’re evaluating firms that have the resources to help you in this specific area.

4. Personalities

Someone once told me that firms don’t sit on your board – individual firm partners do. While it’s important to find a good firm fit, you need to evaluate the personalities of the individuals within the firm. Will you get along with them? Are they good communicators? Do they have some shared interests and long-term vision?

Getting a feel for each individual partner’s management style and personality will help you make a wise decision in relation to which firm you ultimately select.

5. Track Record

When a firm sees a promising ROI, they’re going to pull out all of the stops to convince you that they’re the right equity partner for your business. However, pump the brakes before signing anything. As much success as they might have, you need to evaluate their track record as it pertains to businesses that are similar to yours.

What is their track record with companies that are of a similar age? Have they worked with companies that are your size? Do they have proven deals under their belt as it pertains to companies with the same business model?

Fit goes beyond personalities, management styles, and strategies. You also have to evaluate whether or not the company has been down this road before.

Exit Your Business With InvestNet

Are you looking to exit your business? At InvestNet, we specialize in helping companies find the highest-quality private investors. We’re always looking for companies that have $10 million-plus in sales revenue, $1 million-plus EBITDA, and have target equity of at least $4 million. If that’s you, let’s chat!

Sky Richardson
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