After more than a decade of private equity investing with business owners as partners, I’ve learned that the relationship can seem like a marriage. This is especially true in situations where things don’t go as planned.
For the business owner/private equity marriage to withstand challenging circumstances and generate value for both parties upon conclusion (a “liquidity event”), it is important that partners embrace the following attributes:
- Mutual trust and transparency.
- Shared vision.
- Willingness of each partner to put the best interests of the partnership ahead of personal ego.
- Determination and commitment to make it work.
Mutual trust and transparency
Trust is the cornerstone of all successful relationships. Without it, one can never know for sure where he or she stands. Trust should be built and tested during the courtship phase of the partnership prior to closing the deal and consummating the business owner/private equity marriage.
Key questions requiring answers include: Does my prospective partner always do what they say they will do? Do they exaggerate? Do they tell only part of the story? Are discussions about the business always clouded by sales talk or spin? Are verbal commitments taken seriously?
If each of these questions can be resolved, the focus is then transparency.
Both partners should be comfortable sharing both positive and negative developments. The due diligence period provides ample opportunity for both sides of the partnership to test this attribute.
It is critical that the business owner and private equity investor share a consistent vision for the marriage. This shared vision should influence strategic planning, resource allocation and the incentives built into the deal structure. The realities of the business should be taken into account, with both partners challenging each other as to the achievability of projections given the business environment, the company’s competitive position and overall potential.
Each party should share the SWOT analyses they have conducted from their vantage points and their base case return expectations. For example, the private equity investor likely has a required time-based return hurdle. Similarly, the business owner will have a target exit value. Both need to be in sync.
Willingness to put personal ego aside
Most entrepreneurs believe they are capable and smart, and it can be difficult to acknowledge mistakes. The same applies to private equity professionals who often view their academic credentials and resumes on par with “real world” operational expertise.
Each needs to separate their personal egos from what is best for the company and the partnership. The business owner must be willing to add to the senior leadership team, and even in the most extreme case, allow a more qualified individual to lead the company, if that is what is best for the business.
Likewise, the private equity professional must be willing to acknowledge their limitations and bring in a more experienced member of the firm or qualified consultant, if challenges warrant additional insight.
Determination and commitment to make it work
Unplanned negative events can put a business on its heels. Much like a marriage, determination and commitment are required to drive the partnership through these tough times.
If they have a strong marriage, the partners’ vow of “in sickness and in health, ’til liquidity event do we part” can ultimately pay off.
Craig Dupper is managing partner at Solis Capital Partners, a private equity firm in Newport Beach, Calif., focused exclusively on lower middle-market companies. For more information, visit www.soliscapital.com.