When buying a business, you are going to marry that financial partner, so you better do your homework when choosing one.
How to choose the right financial partner
If you choose the wrong financial partner, your life as an executive in that company could be hell. Therefore, the first thing that we recommend is analyzing several of them. There are more so many Private Equity firms and family offices (family-owned investment groups). Do not only focus on their economic capacity and initial chemistry. Study the operations that they have done previously, speak with the directors with whom they have worked, and ask them how they behave in good and bad times to determine what their relationship style is. Do not make a wild guess. Choose four or five that fit with the requirements that you look for and concentrate on negotiating with them. On the private equity websites, you should be able to see the sectors and the market sizes they invest in and what companies they have invested in previously.
Trustin the financial partner is fundamental. Dedicate time to study the investment team, analyze their culture, their philosophy, and look to see if they are pressured, anxious, and understand the day-to-day realities of the companies or if they are just financial analysts who look at Excel sheets. In your conversations with them, do not leave room for ambiguity. Get concrete answers for your questions: Who will lead the communication with you? How will they supervise you? What happens if you do not comply with the business plan? What is their exit plan? Are they going to let you run the company or will they be involved? Are they harsh with the managers or do they know how to reward effort? Check with the other companies they have invested to see if their answers are honest. If there are things that do not make sense or do not align with you, do not go with them; find other investors. There are a lot of private equity firms and you will have to be with the one you marry for the rest of your corporate life. As in all sectors, there are great firms and not-so-great ones. Try to find the former and negotiate with them. Once you have located them, try to make them compete with others for the deal. If the company and the business plan are good, you will achieve it.
If you want to reach a favorable deal for you, competition is key. When you negotiate only with one party, they will have all the power and you will be the weak link. When you reach this point, it is important to already have established a great partner agreement. The more work you put into the operation, the better. If you present the operation to a private equity firm without preparation, you will have much less power. If you have a comprehensive team and present a very clear strategy, you will be able to obtain more percentage of the capital because you will create more value for the operation. Do your homework before looking for a partner.
How to reach a favorable deal with a private equity firm
In respect to Private Equity, credibility is the fundamental factor. If you want to be successful with them, prepare yourself very well and it will all be very coherent. Do the math – the balance predictions, various accounts, and the expected profitability for you and the financial investor. Only this way can you show that everything makes sense. It will also help you understand the opportunity that you have in front of you and if it is worth it to go on that journey.
To do this, it is important to put your trust in Mergers & Acquisitions advisors so that they can help you locate the venture capital entity that is the most appropriate for you and to create that competition. They will also help you structure the operation. You can prepare your agreement so that the financial investor pays the advisor fees for having introduced you to them.
Financial investors and MBOs
Financial investors are very attracted to management buyout operations (MBOs) for the following reasons:
-They minimize risk. Directors already know the company and the problems that it has. There is less risk of surprises
-Venture capital wants quick profitability, in four or five years. If they put in new management, with the time it takes for them to familiarize themselves with the company, they have already lost a year, which is very precious time for the financial investor
-The director knows what he or she is doing. He or she knows where the management errors were made and where the opportunities lie
-Directors take a gamble investing their money in their business, which will make sure they are aligned with the management and the investor maximizes profitability
-They already have a relationship with the employees. They will be accepted since they are already in charge