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Partnering with Private Equity Firms for Sale or Recapitalization

Partnering with private equity firms via a sale or recapitalization can be great for founders, shareholders, and companies. However, many private equity investors can tell you that the process isn’t without its pitfalls. Getting it right is actually quite difficult; in general, company CEOs and executives don’t have experience with the process. Most executives do it once—if at all.

The most common reason that such transactions fail is that businesses aren’t really ready to recapitalize. But, how do you know if your company is ready? How do you prepare for a successful transaction?

Set Yourself up for Success

Below are some common reasons recapitalization transactions fail. If you want to position your company for a successful process, consider these warning signs.

  1. The company’s products and services are falling out of favor with customers. Investors are always looking for proof points that the future of the company is strong with good prospects for growth and expansion.

  2. The company has significant weaknesses in its operations, processes, systems or documentation (both legal and financial).

  3. There are weaknesses in the management team or questions about the transition, such as who will lead the company after the process is complete.

  4. The company is growing too quickly. Its processes and systems, including technology, can’t sustain the current and expected pace of growth.

  5. Investors and potential acquirers aren’t aware of the company; just as with any customer if you’re a complete unknown, there will be more skepticism. This is a problem that can take 12-18 months to fix.

  6. The articulated strategy is “more of the same,” without sufficient understanding of the market -- both customers and competitors -- to back that up.

  7. The company’s management team, current investors, and other stakeholders aren’t aligned with the transaction -- or with the contemplated future direction for the company.

  8. The new investors discover something the company hoped they wouldn’t find out. Buyer due diligence is intensive; issues are always discovered in diligence. Owners are better served by acknowledging potential problems and providing a plan to fix it.

Anatomy of a Failed Transaction

Here is an example of a common problem the team at Bancroft has encountered. Company A is an investor-backed business considering buying Company B. The founder of Company B is the CEO and owns 80%. In early conversations, the founder talks about taking chips off the table while planning to stay on and build the business. As the parties get closer to the finish line, the founder starts to think about retiring rather than staying with the business.

This comes as a surprise to the private equity company and Company A. The alignment of the people and businesses were important elements of their goals and plans. Additionally, the founder staying on would mitigate transition risk. Now, they have lost the person who would be leading Company B and are faced with needing a new transition plan.

Company A and its private equity group need to make a decision about whether to continue with the transaction, although it might be difficult or costly to pull out at that moment. Company A feels that the change in plans represents a violation of their trust and starts to wonder what else Company B is hiding.

Avoiding Pitfalls

There are many solutions to help circumvent potential problems with a sale or recapitalization transaction. But here is the primary one: hire the right team to help you out. Your team needs experienced people who are aligned to your goals and interests. It will include:

  • A transaction law firm that knows how to get deals done

  • Experts in finance, technology, and regulations who can do initial assessments and help prepare for the process

  • People who have performed such transactions before and have good relationships in the industry. Investors trust that reliable industry insiders won’t permit unpleasant surprises.

  • Reputable investment bankers who have done their due diligence

Are you considering recapitalization or sale of your company? We can help you prepare and give you insight into healthcare industry trends. Contact us and see how we can help.

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