Tips for courting private equity investors and ensuring the best match for long term success

“It is no longer a buyer’s market, and as we move ahead the [power] continues to be more balanced”​ between investors and targets – creating more of a seller’s market, Pat Mulhern, principal and founder of FreshPath Advisory said during a recent webinar on private equity hosted by The Food Institute.

This shift means that private equity firms searching for growth in their portfolio are often willing to over equitize, even in a relatively strong debt market, added Karen Martin, managing director at BMO Capital Markets.

While this is good news for small and medium sized companies looking to get off the ground or join forces with larger companies that can offer more resources for research and development and distribution, the market is still very competitive, Martin said.

With that in mind, Martin and Mulhern recommended companies that want to make their firm more valuable or attractive to private equity take several steps, including:

• Plan for succession​ – Private equity firms want continuitiy in management and are more attracted to companies that already are training or have identified the next generation of managers in-house who can help the company scale once it has the necessary funds, Martin said.
• Demonstrate a history of investment – ​“Private equity by its very nature is very judicious with its capital investment. They don’t invest in things that won’t grow the company or drive cash flow, but they do like to see investment in people,”​ Martin said.
• Work on financial drivers​ – “It is critical to be able to say to a private equity firm that this has been my budget over the past few years and here is how I performed relative to it,”​ Martin said. To show this, she said firms need to track and be able to forecast their business, including key performance indicators that drive cash flow, and manage working capital.
• Manage a long-term strategic plan – ​In conjunction with handling financial drivers, companies need a clear vision and to know their place and its relation to competitors. She added appealing targets often own market intel and know their competitors as well.
• Confirm consolidation trend – ​One way to demonstrate that a company is able to play well with others, including investors, is to buy and integrate a tuck-in company, Martin said. She explained the target “doesn’t have to be large or transformative, but it does need to show the team can manage that type of consolidation.”​
• Know your business worth and that there is a high certainty that a deal will occur – ​Mulhern explains this will give companies the confidence and leverage they need to better negotiate a deal.
• Prepare for business unusual –​ “Things have to go well month to month and as you go through process. You will have more bosses than you have had. You may have owned your business or been in a business unit in a corporation. But now you have potential acquirers looking at you, you have banks and other firms paying attention to your business, not even on a monthly basis but on a weekly and daily basis,”​ which can be disruptive but also the new normal, Mulhern said.
• Be ready for any surprise – ​“Stuff will happen. How you anticipate what is going to happen and how you prepare for that is really important,”​ Mulhern said.  ​
• Be well rehearsed, practiced and confident – ​“You can’t underestimate the need to be rehearsed and in particular not just in your memoranda and views, but being able to answer questions that come at you from all directions,”​ Mulhern said.
• Don’t brag about what you built, brag about what you can do – ​“As an owner, you are really going to sell twice. You are going to sell your business for what you built, and then you are going to sell the business for what the business will be for the new owners as well,”​ Mulhern said.

No matter how much companies prepare for the marathon that is securing private equity investment, Mulhern and Martin note it doesn’t always work out – which is why Mulhern says it is important that owners know when to say no and walk away from a deal that isn’t in their best interest. 

To know when to leave, Mulhern recommends owners:

• Know investors’ motivation – ​Going to dinners or grabbing drinks out is a better way to get to know potential partners or new owners than sitting around a conference room or meeting in hotel. Mulhern says owners need to know why investors are interested to know how honest they are in their opening bids and whether they will make good on an offer of 10 to 12 times earnings, or if they are just saying that with intentions to drop down to six to eight or four to six once they believe the owner is invested in selling.
• Assume the deal will not finish quickly – ​“The venture will get done, but you have to manage your time. Your days are no longer your days in the business. So, you have to plan to have others step up and get into your shoes,”​ while you managing the logistics of the deal, Mulhern said.
• Keep an eye on customer health and continuity – ​During the acquisition or investment process, companies can be vulnerable to competitors stealing customers, players and employees, Mulhern warns.

Finally, he recommends companies limit surprises with timely communication during the process to ensure everyone is on the same page and understands their commitments and deadlines.