Examining How A Private Equity Partnership Can Help Your Business Grow
The priority of any business revolves around growth. Family businesses grow based on the owner’s personal motivations and appetite for risk. This means initially it can be slow and deliberate. On the other hand business families grow at a fast pace. They take advantage of opportunities as they present themselves, requiring the family to adjust to get on board or get out of the way. The difference here is simply the style in which you wish to grow your business.
If you are a multi-unit franchise owner who falls in the category of being a risk-taker, and looking to grow your business quicker, you may be a great candidate to consider a private equity partnership. After participating in an expert panel with a CPA, attorney, and private equity partner to discuss ‘Working with Private Equity as a Franchisee,’ I learned a great deal about the aspects required to make a private equity partnership successful. As a succession planner, the most interesting components to me are the courting period and the separation process. How do you get in, and how do you get out?
If we start with the “courting process” there are some straightforward questions the panel considered:
- What are the options available to securing debt?
- Where does private equity fit?
- Is your corporate structure appropriate for private equity?
- What are the “trendy” brands?
- Is it a good time to go to market?
As important as the courting process is to help you navigate if engaging in a private equity partnership makes sense, it is also important to consider those things that are hard to quantify such as:
- Successor Development - Grooming a successor in the shadow of a private equity partner may be the most effective approach to advancing your culture into the next generation. Accountability to business performance will be a priority, and you will all have “skin in the game” to achieve growth objectives. Corporate earnings will likely be used to service debt and be reinvested to new acquisitions. A private equity partner strengthens an anti-entitlement position.
- Ownership Control - Are your family, current partners, franchisors, and vendors ready for another voice in the room? Giving up ownership means giving up some control, which makes any entrepreneur squirm in their seat. Even if you’ve resolved the risk/reward equation, making this leap without consulting others who have an interest in your success may have negative consequences.
- Team Performance - Once accountability comes into the spotlight, there is less room for average performers and managers battling with complacency. You may need to motivate your team, and be prepared to invest in new talent. Key retention strategies should be considered to ensure your key performers are properly motivated and committed to hitting benchmarks.
- Culture - Growth for the sake of growing can often lead to doing twice the amount of work to earn the same amount of money. Maximizing internal growth, people development, and process refinement may be needed before focusing on external growth, new locations, and facilities. You should assess whether you will need to dilute your talent pool to fill new opportunities.
The mutual goal is growth, and if due diligence is done on the front end with the development of a strategic plan, then everything in the middle of the relationship is just execution – that’s the “easy” part based on core competence. The average holding period for a private equity partner is five to seven years. Assuming everything goes as planned, there should not be any surprises when the time comes to cash out the partner. However, the unpredictable will be dealt with in the fine print, and this is where a lot of focus should be at the beginning of the relationship. Defining Puts/Calls in the partnership should be considered to clarify the separation process prior to any unforeseen event. Agreements are meant to preclude disagreements – discuss and understand your rights and exposures during the “courting” period to avoid issues during the exit process. Look at the conditions that can trigger buyouts on either side and discuss them with an attorney.
A private equity partnership will demand performance as a priority since the relationship rests primarily on quantifiable data. Accountability to performance is fundamental. You can always make more money, but you can’t always repair relationships. We tell our clients that no business gain is worth a family loss. Every family business must balance these competing priorities, as any shift too far in one direction will either derail the family or derail the business. It is worthwhile to assess your paradigm before engaging with a third party, as they are likely assessing you in this area as well.
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