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 [email protected] or
(312) 476-7599.
