Before you decide to accept an investment from a private equity company, consider the alternative of improving the company yourself. Accept PE investment dollars and you very likely will need to continue working at the company for 1-5 years after you take PE money. You may be enticed to make more money with a “second bite of the apple” when the PE firm exits. That exit has grown from a typical 3 years to nearly 7 years.
According to the Tenth Annual PE Leadership Survey by Alix Partners, (1)
“The goal of PE firms is straightforward: They buy companies expecting to sell them at a later time with improved enterprise value. Achieving that result begins with finding companies with unrealized potential and developing a deal thesis—the animating idea for value creation, usually a transformative combination of cost cutting, organic growth, strategic talent and operational upgrades, and additional acquisitions.”
“But most of the value creation—turning the thesis into outcomes—happens during the multiple years of ownership, and that in turn depends on hard work by leadership and management in the form of a combination of strong and effective portco executives and collaborative support by the owners and investors, usually through operating partners assigned to oversee particular portcos. Bottom line, it’s all about sustained discipline by all parties to execute value creation and realize tangible impact. Although PE firm and portco leaders disagree about many things, they understand the fundamental assignment. For both groups, the top three priorities—and challenges—are achieving top-line growth, meeting value-growth targets and milestones, and improving margins through operational effectiveness. Not surprisingly, PE firm executives are more emphatic about the importance of those financial results—because they are investors first and foremost—but both groups know what’s most important.”
You’ve likely been your own boss for 5 to 45 years. When you accept PE money, even if it is a minority interest, you now have a shareholder or boss that may have slightly different priorities than you. Here is an example chart from the report showing the top 3 goals of the PE investors, and the leadership (YOU) of the Portfolio Company. Note the differences that may cause distress in the company you’ve built.
These top 3 priorities are amazingly similar to the top 3 goals of CEOs described as:
62% of owners want more money — grow
21% of owners want more time — easier to run or improve ops
17% of owners want more money and time — prepare to sell
According to the survey, portfolio companies with PE investment look to the PE company to provide
An alternative to accepting PE investment is to invest in yourself through improved profits and cash flow and accepting bank debt. A business coach can help you to achieve your long range goals by helping you create Predictable Profits and Cash Flow, Predictable Revenue Growth, and Predictable Equity Value. A business coach can help you and your business get even better without you losing control and influence. The coach can help reinvigorate you and your leaders and provide the needed experience you lack.
Want to explore the alternatives? Want a coach that can see what you don’t see?
Let’s talk https://calendly.com/paul-ba
