In today’s market, private equity (PE) firms are flush with cash, making it common for sellers to receive similar financial offers from multiple bidders. This scenario means there are factors to consider beyond the pure economics. If the financial terms are equal, how should you decide which PE firm to partner with?
Below, our Managing Directors at Caber Hill Advisors have assembled the key criteria they advise clients to consider when vetting not just buyers, but potential partners:
Experience Fit: How to Examine a Firm’s History
Industries
Imagine you own a dental practice and receive identical offers from two PE firms. One firm has a long track record of investing in healthcare services, with numerous references from satisfied sellers. The other is a generalist with minimal, recent experience in healthcare.
Who has the edge? It’s safe to say that firms with a deep understanding of your industry can lead to better strategic decisions and a smoother transition.
Company Size
PE firms typically target companies within specific EBITDA ranges. For instance, some firms focus on companies with $4-10M EBITDA, others on $8-15M, and some on $25M or more. Aligning with a firm whose typical investment size matches your company’s EBITDA ensures better expectations and performance alignment. A firm familiar with your company’s size will be more adept at addressing its unique challenges and opportunities.
Overall Investment Performance
Evaluate PE firms’ historical investment performance to gauge their success in growing and exiting investments similar to your company. Look for patterns of sustained growth and successful exits, as these indicate a proven ability to add value and achieve favorable outcomes.
Vision Fit: Aligning on Growth Strategies
Growth Strategies
Consider your company’s growth history and future ambitions. If your business has primarily grown through organic means or de novo expansion, partnering with a PE firm that emphasizes aggressive M&A could significantly alter your business model. Assess whether they can support this shift and if you can execute it successfully. A misalignment here can lead to strategic conflicts and operational disruptions.
Management Team Incentives
Ensure there is agreement on any management incentives, which typically involve both cash bonuses and long-term equity incentives. Properly aligned incentives can motivate your team and drive the company toward shared goals. Discuss these details upfront to prevent misunderstandings down the road and to make sure the leadership team stays motivated and committed.
Value-Add: Resources Beyond Capital
Expertise and Operational Support
Some PE firms bring additional value through operating partners with expertise in key functional areas such as HR, digital marketing, and more. These resources can provide invaluable support, helping your business scale efficiently and effectively. Evaluate the firm’s track record in providing this kind of support and the tangible impact it’s had on their portfolio companies.
Synergies with Portfolio Companies
Synergies can offer immediate revenue opportunities and operational efficiencies. For example, a PE firm bidding on a roofing company might also own a large real estate portfolio, providing a ready market for your services. Look for firms whose existing portfolio can create synergies that benefit your business.
Personality Fit: Ensuring Compatibility
Building a Strong Relationship
Consider this partnership a long-term commitment. You’ll work closely with your new partner over the next several years, often under high-stress conditions. Ensure that there is good chemistry and mutual respect. Like in most aspects of life, those components go a long way to maintaining a healthy relationship.
Adapting to the PE Environment
PE platforms can be demanding, with intense reporting requirements and accountability to a board. Ensure you are comfortable with these dynamics and confident in your ability to maintain a positive working relationship. Understanding and preparing for what the PE environment entails will help you navigate the transition smoothly.
Tie Breakers: Additional Considerations
Fund Dynamics
Determine where your company sits in each fund’s investment cycle, paying particular attention to whether your company is the first or last investment in the fund. This can influence numerous factors including the hold period (e.g. timing to the next recap), the resources allocated to your business, and your PE partner’s definition of an acceptable return.
Add-On Only Considerations
When evaluating offers to be an add-on acquisition, it’s important to understand the unique considerations involved.
Evaluate how long the PE firm has owned the portfolio company that is acquiring you, the equity value at which you are rolling in, and the company’s capital structure, as all can impact the return on your rollover equity. The hold period—or how long the PE firm plans to hold the investment—can impact the overall return profile. If the firm is nearing the end of its investment period, there may be less time for growth, potentially affecting your financial outcomes. It also may mean that you need to endure a change in ownership, as your employment agreement, earnout, or other contractual obligations may transfer to the new PE owner in a sale. Additionally, consider the equity value at which you are rolling in, as this impacts your return upon exit. Some PE firms consistently mark up the share price of their investments, while others do so less frequently, so even when controlling for hold period/investment cycle timing there can be significant differences in the potential return.
Last Word
Choosing the right PE partner involves much more than evaluating financial terms. By considering these key factors—experience fit, vision alignment, value-add resources, personality fit, and additional tie-breakers—you can make a more informed decision that aligns with your company’s long-term success.
This approach ensures both the capital needed to grow and the benefit of a partnership that boosts your operations and advances your strategic goals.
