When private equity knocks, should you open the door?
Do your homework and reflect seriously on what you want before deciding
Private equity is becoming a major player in industry after industry – professional services, healthcare, real estate, and the list goes on.
It would be easy for the owner of just about any successful business to experience the dreaded FOMO, or fear of missing out. And easy to be blinded by the stars in your eyes when someone starts talking about the pile of cash they might want to invest into your business.
After all, if you see some of your top competitor suddenly flush with cash after a private equity group comes on board, you have to wonder what they are up to. Will they use the money to invest in technology that will give them a major competitive advantage? Or perhaps to open additional offices in new markets? Or maybe even to hire away your best people?
It's enough to make a business owner lose some sleep pondering the possibilities.
But what if investors knock on your door? Are you interested? Should you be?
Question 1: What will change?
It’s complicated, to say the least. Perhaps the first question to think about is this: What will change if you accept the investors’ money?
Keep in mind that their goal is to make a healthy return on their investment. Which may be stating the obvious, but you need to consider how they will want to achieve that goal. And how much control they will want over your business.
Given that millions of business owners – and possibly you, too – value having control over their own destiny more than just about any other aspect of owning their own business, I can’t overstate how important it is for you to think long and hard about this.
Funding comes with strings
You see, private equity investors don’t typically offer a pile of cash and then sit on the sidelines, hoping you succeed. They offer their funding with high expectations of you and the business.
You probably will be expected to provide detailed and frequent reports to your investors. And to answer many questions about those reports and their data. The investors might be quite specific regarding operational, financial or management changes they want you to make.
Such changes could include hiring or firing someone they want on or off your team. Or insisting that you use certain vendors in your supply chain, requiring you to move your money to a certain bank, instructing you to get into a new line of business, or telling you to move your business operations to a different location, among many other possible demands.
These could be brilliant moves or disastrous ones for you and your company. The best way to prepare for such oversight is to do just as much due diligence work on the investors as they do on you before any legal agreements are signed.
Research, research, research
Find out as much as you can about how they have worked with other companies in which they have invested. Talk with the owners and leaders of those companies about how they feel six months or a year after signing on with the investors who are now interested in you.
Research the investors as an enterprise and as individuals. Do they have any legal entanglements? Have they been in the news, good or bad? Do they have a track record of success that bodes well for your company? Do they have the capital they claim to have?
Keep asking questions. Here’s another good one: Are other sources of cash available besides these investors?
And don’t go it alone. This is the time to consult your circle of mentors, friends, and advisors. Spend some money on a good attorney with relevant experience on your side of the investment equation and be clear with them about what you would want out of the deal…and any lines you will not cross.
Control vs. cash
Stir all of the intelligence you gather together and ask yourself: Is it worth it for me to give up a significant level of control over the business to get the benefits of accepting the investment cash?
The answer, of course, is up to you. But don’t answer that question until you have done serious homework and deep reflection on yourself and what you really want.
Eric Whittington has been advising businesses, from startups to Fortune 200s, about complex strategy questions for decades. Contact him at EricW@ThisWGroup.com or 210.240.9041.
