What Happens When Your Company Is Bought by Private Equity [First 100 Days]
- How bringing on a private equity partner presents new challenges and opportunities
- What the first 100 days of working with a partner looks like
To say that crossing the finish line with a new private equity partner is an exciting and rewarding experience is an immense understatement.
As a founder, closing a minority or majority recap with a PE investor will mean moving to the next phase in the evolution of your company, one that will bring new challenges and opportunities. The difference is that this time around, you’ll have a lot of liquidity and an experienced partner to provide guidance and support your efforts.
But what exactly will that new partnership look like? Having represented many founders for closed deals with PE firms, below are some of our thoughts about what founders can expect post-transaction.
New Opportunities and New Expectations from a New Partner
When a private equity partner makes a big bet on your company, they are certain to have high expectations. Specifically, they will have financial objectives in mind that they expect to realize, and their relationship with you will reflect those objectives.
Despite any newly introduced financial pressures, if you approach the capital raise process correctly, you will close a deal with a partner that has a shared vision. As such, their objectives should be aligned with your own, and the partner will help you grow the company in ways that you couldn’t or wouldn’t have done without their help and capital.
In light of these new expectations, after you’ve taken a short break to recover from the ardor of the transaction process, your partner will be ready to get to work. And thus begin the first 100 days post-transaction.
The First 100 Days with a Private Equity Partner
The first 100 days or so of your new partnership are where much of the adjustments to your company’s focus or direction will happen.
At the beginning of these first hundred days, a top priority will be to create an action plan. This action plan will come about as you and your partner define go-forward aspects of the company’s strategy. Any item included in the action plan will be a priority during the first few months.
Some of the most common elements of an action plan include:
- Talent acquisition and development (Getting the right people on the bus)
- Needs analysis (Leveraging strengths to mitigate weaknesses)
- Budgets and financial controls (Agreeing on a plan and budget)
- Capital structure (Refinancing debt)
- Reporting (Standardizing KPIs and other metrics)
- Tech development (Addressing high impact technology issues)
Talent acquisition & development
Getting the right people in the right seats at your company is a key factor for leveling up performance and will be a top priority for most PE partners. As such, your new partner will work with you to:
- Evaluate your talent acquisition funnel
- Help build out a recruiting function
- Bring in new talent (often from their own network)
- Fortify talent retention (such as through new option pools or equity incentive structures)
In some cases, getting the right people in the right seats will mean the founder steps down from the CEO position to be replaced by a professional CEO (something you’ll discuss during the deal process). In this case, your partner will have a wide network of CEOs from their other portfolio companies that they can recommend.
If, however, you and your partner determine that as a founder you should stay on as CEO, your partner can give you access to mentors to help you further develop your skills as an executive.
Strengthening areas of your company that historically have been weaknesses is where much of the success of a partnership comes to fruition. As part of your action plan, your new partner will work with you to conduct a needs analysis and develop a plan to leverage strengths to mitigate weaknesses.
If going into a transaction you have a specific area of the business you’d like to improve, keep in mind that some firms will have entire operational teams dedicated to a specific function, such as developing a sales & marketing program. Knowing which firm/partner has had past success in a specific business function will help you find the right fit.
Budgets and financial controls
Much of the discussion around financials will be about setting a budget as a financial guidepost and allocating required resources to hit projections. If your transaction involves adding primary capital to the balance sheet, you and your partner will discuss where to spend this new capital.
Early in the relationship, a lot of focus will go towards meeting or exceeding financial and operating projections. As such, you want to be thoughtful about the viability of the projections you present during the transaction process. Missing projections early on can put a bad taste in everyone’s mouth, so lean on your advising investment bank to help you build out projections that will set you up for success post-transaction.
By virtue of being a large financial institution with hundreds of millions to billions of assets under management, private equity firms qualify for debt financing with favorable terms. If debt constitutes a portion of your capital structure, your new partner should be able to help you refinance that debt with better payment terms/a lower interest rate.
In order to better manage performance across portfolio companies, firms will often come in with a standardized set of KPIs that they use as the company’s thermometer. For founders who haven’t invested many resources into reporting, this exercise with a new partner can be helpful to illuminate strengths and weaknesses in key areas.
For the most part, your partner won’t intrude much on your product roadmap or technology stack. The only case where a partner might strongly recommend action in this area is if during the diligence phase of your transaction the partner uncovers a glaring issue in your technology, such as technical debt or the lack of a key integration.
What Happens After the First 100 Days?
Creating alignment around an action plan in the first 100 days is the most involved aspect of working with your new partner. If during those first 100 days you’re able to execute on your action items (especially in hitting projections), your relationship should be off to a great start. At that point, you can expect monthly to quarterly meetings to review performance and make course corrections or strategic decisions.
In the event that issues arise, such as missing projections early or discovering unresolved technical debt that should have been addressed in diligence, the path will be rockier. You can expect more frequent meetings/updates and more pressure from your partner. To avoid a future taint in the relationship, an advising investment bank can help you surface all potential issues during diligence, position them in the best light, and still realize a successful outcome.
The End of the Partnership
Your partnership won’t be indefinite. For a private equity firm to realize a return on their investment, eventually they have to liquidate their stake in each portfolio company. As such, each private equity deal has a clock on it, usually 3-6 years (the "hold period").
If the company does not engage in a liquidity event during the hold period and the hold period comes to an end, the investor will exercise their right (called a redemption right) to force a sale of the business and liquidate their stake. At that point, the partnership is effectively over.
For founders, this secondary liquidity event (often called a "second bite of the apple") can represent another great economic outcome, since their remaining stake in the business will have grown in value with the help of a partner. In some cases, and depending on the type of buyer, founders will choose to roll over equity into a new partnership and continue the path until they fully exit the business.
Reaching the Finish Line with the Right Partner
When founder and partner are fully aligned, working with a private equity firm can be a highly positive experience for founders. The key to achieve alignment is to orchestrate a sales process that attracts the best investors so founders have many options to select from. When founders have a wide array of qualified investors to choose from, they’re more likely to land with an awesome private equity partner.
As a founder, you likely don’t have much experience structuring or running a transaction. Nor do you have much time—you’re already spending all your time and energy running a business. Hiring an investment bank to run the transaction for you can be the best decision you make.