Everything is great. Your company is spinning off cash, your customers could not be happier, and you even just made an acquisition. It was the easiest acquisition your company has ever completed because your private equity partner took care of everything. This is not uncommon. Ever since you decided to sell to the PE shop, you and your employees have never looked back. Life could not be better.
However, chances are your company will not be private equity backed forever. The average private equity firm seeks to exit investments after a three to five year holding period. We have worked with executives that have risked losing control of their company’s future by not preparing for this inevitable transaction. These executives are then faced with tumultuous potential partnerships and a potential fire sale of their once thriving business. Here’s a few pitfalls (and true stories) that you want avoid:
Know the market
Private equity firms know how to deals in the private market better than you – that is their job. From the moment they make an acquisition, they immediately begin preparing the company for eventual sale. The moment you are acquired, the PE is solely focused on your success and putting operations and structures in place to prepare you for eventual sale. This does not mean that the PE group does not value you and your company, or act 100% in your best interest – it means your company is an investment. However, the PE group does know your market or industry even close to as well as you. You built this business and know the inputs and economic forces that define your ultimate success. Executives who recognize this fact, routinely research, identify, and engage other firms through the private market. In addition to knowing other companies and specific PE shops in your industry, you should compliment that research through reports like Bain Capital’s Annual Report and a host of others for guidance on industry trends, company valuations, and future projections on the economy. These reports provide immediate insight how you can best evaluate your company’s transactional future options and build a timeline of your PE partner’s potential exit strategy.
Deals fall apart. When you are first acquired, you are the hottest investment in the portfolio. There are press releases, announcements, and tons of attention from the PE partners. However, eventually you become a part of the portfolio as the PE group will not be able to give you the same attention. Due to global economic conditions, industry trends, and technology disrupting existing business models, sometimes a once strong relationship becomes strained.
For example, if the relationship with your private equity partner is no longer tenable – you need to regain control of your company. But it’s not the private equity group’s job to help you now. They’re focused on conserving future cash reserves, making a decent return on their investment, and lining up a new acquisition target. It’s all on you now. At this point if you and your executive team have been taking four day weeks, playing golf at lunch, and 60 vacation days a year, you could find yourself void of a network, unconnected. You have no concept of who the turnaround bankers are in your industry, what a crisis management advisor could offer you, or which competitors have the cash on hand to take a majority interest, while allowing you to keep your management team together.
The public markets have some degree of predictability based on public reporting requirements, however the private space provides little if any visibility. Visibility into the private space depends on the quality (and size) of your relationships and network. You should continually field calls from qualified investment bankers, private equity shops, and other potential investors even if you are private equity backed. These firms provide regular insights and feedback into your industry and what other economic trends could affect your business.
Your private equity partner calls and a buyer just offered to acquire you – two years ahead of schedule. They didn’t see this coming and neither did you, but your PE partner is going to sell. However, they want to let you match the buyer’s offer. In fact, they will even give you a discount if you can get the capital together, but you have only have sixty days. What do you do?
PE routinely does the right thing by allowing their portfolio companies (and the employees) to repurchase the company from their control. One option could be to do a ESOP. One company we recently spoke to brought on new PE partners and completed a buy back of his company after he realized the current PE owner was not fulfilling his fiduciary requirements. These companies were prepared. The reality is that most companies are unprepared due to a reduced amount of networking with investment bankers and others as soon as they were acquired by a PE firm. This shortfall in meaningful relationships can lead to a frenetic search where the company is now at a disadvantage looking for any potential partner/advisor – no matter the cost.
These are real-life scenarios that affect private companies across the world. There are transactions brewing and situations forming at every moment that can affect your company’s future and your personal well-being. Constant exposure to industry reports can shed light on your industry’s trends and economic events affecting your business. Routine conversations with inbound interest from highly qualified bankers and industry experts helps you get a feel for the market and what the most active and successful firms are focused on. Finally, proactively taking control of your relationships and your business future can be accomplished by seeking new connections and networking with the most relevant firms through places like trade shows, industry events, and networks like Axial. These places allow you immediate access to entire universes of new firms and companies in your industry that can prevent situations like the above from occurring and ultimately be there when you need them most.