Governance is a big difference for many family-owned businesses when taking on a private equity partner.
Private equity funds meet with the management team at least on a quarterly basis to understand performance over the past quarter and also provide guidance for the balance of the fiscal year. Private equity funds will more often than not control the board and include independent board members who are handpicked by the private equity fund due to their expertise in the particular industry or business.
These board meetings are typically much more formal and structured than the way many family-owned businesses conduct a board meeting, to the extent that they have these types of meetings at all. Most private equity funds also have a board package template that they want the management team to use, which will be much more comprehensive than most are currently using.
Many private equity funds want management teams to produce not only a lot of financial information, but also operational key performance indicators, liquidity and working capital analysis, and covenant calculations.
Reporting will certainly be at least monthly and should include some type of weekly flash report or in some instances, a daily report on where cash and net working capital are at the end of the prior business day.
While some business owners find this level of scrutiny overbearing, it does provide a level of communication and an early warning system to any impending trouble.
Private equity funds have their own businesses to run, so please know that if the numbers look good, the business owners will have plenty of freedom without concern of the private equity fund calling continuously to inquire about the performance of the business.
In many situations, private equity funds rely on leverage in an acquisition to enhance investment returns. This leverage will introduce a bank into the equation that has its own set of monitoring and legitimate information requests.
Taking on additional capital or making adjustments to the balance sheet or operations of the business often requires consent of the bank. This can be a time-consuming process, although many banks are developing dedicated industry groups to speed the process and provide insight, in addition to providing loans.
Finally, private equity funds expect to be reimbursed for reasonable expenses associated with travel related to their visit (just like any other executive of the company would). Expenses related to their visit would include not only the quarterly board meetings, but also other scheduled meetings in between.
Reimbursement policies will also extend to independent board members (who in many cases receive board fees for their time) and third parties working with the company to improve and/or accelerate performance.
Private equity is a good option in many cases, and going into the partnership more aware of all of the adjustments will help you make the right decision. ●
Jeffrey Kadlic is co-founder and managing partner at Evolution Capital Partners LLC