Private equity essentials Featured

8:00pm EDT July 26, 2008

There’s money out there waiting for just the right opportunity. Could it find what it’s looking for in your business?

“With the slowdown in the market, private equity funds have been holding back slightly, which has them accumulating reserves,” says Philip E. Ruben, a partner in the Chicago law firm of Levenfeld Pearlstein, LLC. “But private equity funds must invest to provide the needed returns. If business owners can’t obtain capital for growth, expansion or acquisition through traditional financing, then their first alternative should be seeking out private equity.”

Smart Business spoke with Ruben about what types of businesses typically receive private equity, how to prepare for investors and how to overcome challenges in the process.

What makes obtaining private equity (PE) difficult for business owners?

Many PE funds have specific investment criteria that business owners must meet for a match to happen. Also in today’s marketplace, PE funds are really looking for ‘interesting’ companies. Unusual niche businesses, like extremely high-end denim retailers, can attract PE capital. Also industries with fast, dramatic growth, like metal companies, where returns have suddenly jumped from 10 percent to 25 percent, have a good chance of acquiring funding through this channel. Run-of-the-mill companies and those looking to refinance existing debt aren’t currently attractive to PE funds.

Business owners need to be able to clearly demonstrate that they have strategies with real growth potential and the ability to add real value. These include organizations that can move manufacturing overseas to improve margins or those that can use their specific expertise to create significant increases in revenue and profits.

Lastly, the due diligence process can be very taxing, costly and distracting. Most business owners have not been through the process before, and it ends up taking them away from their operations. While this can be an educational process for the owner, it can be frustrating if it doesn’t lead to a transaction.

Why can private equity still be an attractive financing option?

PE fund investors have much more flexibility than standard and investment banking financers. This means they can complete deals that traditional investors could not. Also, depending on the industry, the size of the company and the nature of the fund, PE can provide appropriate leverage. PE funds can step up to complete deals in industries like health care, financial services and technology that require high levels of equity.

When should companies pursue funding?

Business owners should start looking into PE in their planning stages, preferably up to a year before they need it. Conducting a search for the right fund is not necessarily a difficult process, but opening the right doors can require persistence. By extending the timeline, business owners help to create a competitive market for the capital, reduce the stress created by imminent need and keep an even leverage in negotiating the terms of the deal. PE fund managers know about business owners’ needs and timing and will use this to their advantage if there is a high, urgent need for funds.

How can businesses prepare themselves for investors?

Individuals seeking capital should have a strong management team and an advisory board of directors composed of outside industry professionals who will give their honest opinions to assist in all phases of the process. Business owners also need to prepare themselves to disclose both good and bad reports on a timely basis.

What else increases a company’s chance of success?

Business owners should have detailed business plans, projections and growth strategies. This includes disclosing the risks and downsides of their operations. PE funds don’t want surprises nor do they want to find out information from outside sources.

During the process, business owners also need to make sure to stay focused on the business and not to let the process distract them too much. Using professionals to guide the transaction helps everything to run smoothly.

How can a lawyer help facilitate the process?

The right lawyer can act as the ‘quarterback’ in the process. To successfully handle these responsibilities, the lawyer needs to understand the client’s business needs and goals, be creative and know the marketplace. The lawyer also needs to be direct and open about expectations. Valuations have changed due to lowered returns so sellers need to have a realistic understanding of current market pricing.

Lawyers can help clients structure the transactions, which may include contingent or special consideration arrangements. Legal professionals can also assist business owners with understanding earn-outs, tax implications, consulting agreements and other equity structures.

PHILIP E. RUBEN is a partner with the Chicago law firm of Levenfeld Pearlstein, LLC. Reach him at or (312) 476-7599.