Private equities have many techniques to get what they want. They are manufacturers: they manufacture money, buying cheap and selling expensive, so beware.
Don’t only negotiate with one private equity firm; prepare alternatives, whether they be private equity or other buyers and investors. If you only negotiate with one, you will lose your negotiating power.
The sale of a stake to private equity is usually a more complex process than selling to an industrial investor. Therefore, I strongly recommend that you don’t embark on negotiations alone; hire a professional advisor who is as prepared as your counterparty is.
Private equity firms will try to get exclusivity during negotiations; don’t grant it to them until you have a good letter of intent. This way you won’t lose negotiating strength while you try to agree on key points.
*1*When negotiating with a private equity firm, I recommend that the letter of intent be as binding and closed as possible.*2*
I try to negotiate all the key areas of the operation in this agreement so that the private equity firm has less room to maneuver after due diligence is finished.
I suggest you to do a due diligence and analyze the private equity firm you are negotiating with. A good way of doing this is to speak with other owners who have worked with the firm. Private equity firms usually put the companies they have invested in on the website.
They will be your partners and you will have to trust them when they become part of your company, but before then they are your opponents and you should be careful to protect your own interests.
Written by Enrique Quemada, President of ONEtoONE Corporate Finance.