Much of selling in this market is being able to tell the company’s story. To do that, says Resolute Capital Partner Andy Tatman, founders and CEOs need to be prepared.
“We see founders, CEOs who are fantastic at communicating their vision, who can tell their story — they believe it, they live it every day. But oftentimes, we start the diligence process and start getting underneath the hood and they're not prepared for having an institutional partner,” Tatman said at the Nashville Smart Business Dealmakers Conference. “Their financial information systems aren't there, their technology systems aren't there to be truly scalable. So, it's not always enough just to be able to tell the story. You've got to be prepared for that diligence process that comes with bringing in a private equity partner.”
To be better prepared, it takes looking ahead and planning. That could mean having an adviser who can offer perspective on what it’s like to go through a diligence process and offer advice on how to best prepare for it. When a seller is prepared, their story can have more impact.
“When you’re doing that and when you're ready, you've got a story that then you can communicate of, we are ready to hit go on that growth. We are ready to really press forward,” he says. “And some of that's just putting together your financial model. Some of it’s being transparent about what the strengths and weaknesses of your businesses are, what investments that you need to make.”
For founders, he says there should be two key areas to ask a potential private equity investor about on the front end. One is about communication. What is that cadence of communication that the private equity team expects? What are the board meetings going look like and what reporting are they expecting? That’s important, he says, because different groups have different expectations.
The second set of questions should be around what it’s really like to work with the PE partner. That can be determined by talking to CEOs in the firm’s portfolio. But, he says, don’t just talk to those for whom things have gone well.
“Let me talk to some other CEOs in a deal that's gone sideways, that haven't gone well,” Tatman says. “What kind of partner are you when things get hard? Really truly understand how does that group act when things don't go right because things don't grow linearly. Every deal that we're in, at some point in time, hits a quarter, hits a year where there are headwinds, and it's going to go backwards. But who are you truly a partner with? That's when you find out. So, being able to talk to somebody who's lived that with that private equity group should be a key part of the diligence that you're doing on the private equity group that you're partnering with.”
Something that founders often don't ask private equity groups about is where is that private equity group in their fund life?
“If you're getting involved with a private equity group and you're their last deal in that fund, that runway is going to be somewhat different than if you're in the first year or two of that fund,” he says. “Their expectations, their availability of capital, their timeline, that changes. They’re businesses. We have fund lives that we have to manage as well.”
Founders that ask where they sit in the fund life can learn more about how much capital is available for the transaction, what has been reserved and the timeline, among other things. Knowing that can greatly inform the strategy.
Additionally, he says the right time to make that partner is early rather than later. They should also look to understand a private equity group outside of just their cash investment to learn what else they bring to the table.
“I know a lot of founders are thinking, what's that second bite at the apple look like? Who's that partner that can get me to that second bite at the apple? What is the right structure of the deal that gets me that next bite and who can help me get there?” he says. “I think it's taking a long-range viewpoint of saying, ‘I may be giving up control today but how do I want to structure that? Who do I want to partner with? Because ultimately, I want to take my business from here to here and can they help me do that.’”
