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How can founders pick the right private equity partner? Hint: it’s not just the money…

By January 3, 2020October 20th, 2020No Comments

There is often considerable soul-searching involved before a founder decides to work with a private equity firm to scale their business.

“Is this the right firm for me and my company? Will they be true partners, or simply provide capital and expect an aggressive growth trajectory and fast returns? Am I handing over the keys to a business that I’ve spent blood, sweat and tears building up from nothing? What about my legacy?”

Over the course of almost 20 years at CAI, during which we’ve invested hundreds of millions of dollars in ambitious companies looking for the next leg of growth, we’ve heard all of these questions and many others like them.

Founders are right to be thoughtful. After all, the business owner must decide that ceding a significant amount of equity in their company is a fair trade for the promise of greater scale, long-term growth and ultimately a lucrative exit. Those who want to own their whole company, or are content to grow more gradually while bootstrapping their business, likely wouldn’t fit well into a typical private equity deal.

But for those ready to take the plunge, when does private equity work best? Our philosophy, across decades of investments in some 30 portfolio companies, is that a private equity deal delivers optimal results for founders when it is based on true strategic partnership.

Put another way, it’s about much more than just the money.

We believe that the right approach is to work hand-in-glove with founders to develop a sustainable model for value creation that transforms their small or medium-sized company into a professional-grade organization, unlocking its full potential in the process.

At CAI, that has meant focusing on two key areas: helping the founder dramatically grow the business over time and working to ensure the company will attract a compelling multiple when the founder exits.

Growing the business

Once the partnership begins, we leverage our network to help the founder ensure that the right people are in the right roles across the organization. That may mean, for example, that the company’s sales organization might require a talent upgrade, or that a promising middle-level leader should be given a greater role elsewhere in the business. In all cases, the goal is to attract talent that is best positioned to drive sustainable growth.

We also put in place strategic planning and budgeting processes, or augment and professionalize them as necessary. The goal here is to give management clear insights to improve decision-making and enable them to make data-driven decisions rather than navigating by gut feel.

At the same time, we invest in equipment and capacity as needed so that the business can successfully absorb growth in revenue rather than struggling to meet new demand when it materializes. We also examine opportunities for geographic expansion into new markets, M&A opportunities and whether the company’s product portfolio should be broadened out.

Unlocking value at exit

The second area of focus is positioning the business to receive as attractive of an offer as possible when it’s time for the founder to exit. Founders (rightly) care deeply about the legacy they will leave when they depart the company they’ve built, and ensuring that they grow, preserve and ultimately unlock its value is a key consideration.

With that in mind, we help to ensure that a high-powered management team is in place and that there are no succession challenges that could get in the way of a smooth and value-added exit transaction. We also seek to position the business with several clear paths to sustainable growth, along with the infrastructure to support it.

How the business is perceived in the market can be another important valuation driver at exit. We help founders and their teams develop strong, compelling and consistent messaging that translates into a respected brand and a great reputation in the eyes of customers.

Businesses are only as healthy as the quality of their revenue, and because of that, it’s important to pay attention to diversification (by geography, customer type and so on) and to minimize reliance on the company’s supplier base wherever possible.

Last but certainly not least, how well the sale process itself is structured is critically important, and thinking ahead is key. As a result, we engage with top-tier advisers well in advance of an exit, in addition to identifying potential buyers and developing appropriate due diligence on them and the market more generally.

Throughout all of this, the capital we invest certainly plays a critical role as a scale-enabler and growth accelerant. However, we believe our partnership approach, operating expertise and professional network are our true success drivers, in addition to our disciplined focus with respect to the types of companies in which we invest.

If you’re a founder thinking about a private equity partnership, you’d be wise to consider what sort of partner you would find most compatible. That soul-searching – beyond just the size of the cheque – is critically important to ensuring that your business faces the future from a position of true strength, and that your legacy is a thriving one for years to come.