For many entrepreneurs, most of their personal wealth resides with their business. Eventually, a business owner may look to take some chips off the table and gain liquidity while retaining a portion of what he or she believes will be a bright future for the business. In this situation, a private equity investor could provide the best opportunity to meet the entrepreneur’s goals and objectives. Selecting the right private equity partner can set a business on a dynamic growth trajectory, but partnering with the wrong group could jeopardize the company’s future. Answering the following questions can help maximize your chances at a successful private equity partnership. 

 1. Does the Private Equity Fund have experience and success in your industry and/or end markets? 

Private equity funds vary significantly in the types of businesses they focus on. While some successful firms are industry agnostic, others target specific industries and end markets. If you are planning to retain significant equity in the business post-transaction, a considerable stake in your financial future will be tied to the private equity partner you choose. Seek out a PE firm with a successful track record in your space.  

A good start for screening potential private equity investors is to explore a firm’s website to identify end market experience through their current and prior holdings, the firm’s stated acquisition criteria, and experience residing with current team members.  

• Are there similarities between their current and former portfolio companies and your business?  
• Do they have prior experience investing in a similar space? What was the outcome?
• Does your business fall within the revenue and/or EBITDA range of companies the firm prioritizes? If so, how long has the firm been focusing on businesses of your size? 
• Does the firm employ operating partners? If so, do you think any of theirs could add value to your team?
• Does the fund demonstrate a firm understanding of your business and the industry’s competitive landscape?   

2. How does the Private Equity Fund interact with its portfolio companies? 

If you anticipate selling a controlling stake in your company, you will have a boss for the first time in a while (possibly ever). Consequently, it is important to understand the firm’s management style and how they interact with their portfolio companies. Ask the firm if they will put you in touch with references in the form of previous owners they have partnered with. If the firm does not make them readily available, this could be a red flag. In this case, consider investigating through LinkedIn and other resources to identify former CEOs and schedule conversations. After connecting with the former CEOs and learning about their experiences working with the firm, assess whether you could envision yourself operating under similar conditions.  

Some private equity funds are more hands-on than others. Additional questions to ask may include:  

• What should a portfolio company expect from a communication and reporting standpoint? You can assume quarterly board meetings, but will there be daily, weekly, or monthly calls?  
• How often will representatives from the firm be at the company?
• What types of issues should be raised to the private equity partner vs. decided by management?  

Make sure the firm’s management style, communication and reporting expectations fit with your organization. While a prospective partner may subject your team to more structured and thorough reporting and accountability requirements, be open to the idea that this may benefit your business through optimization of your internal processes and procedures.  

 3. How does the Private Equity Fund approach value creation at its Portfolio Companies? 

If you retain equity after the transaction, you and your PE partner will share a strong financial interest in increasing your business’s enterprise value over the next 5-7 years. Before selecting a partner, you should understand how the PE firm envisions growing the company and how they support growth within their portfolio.  

Some PE firms have earned a reputation over the years for acquiring companies only to run them on shoestring budgets, reducing labor and overhead to squeeze everything they can to the bottom line before reselling the company for a quick profit. Fortunately, not all firms follow this playbook. Increasing a small to midsize business’s enterprise value typically requires top-line organic growth, which usually necessitates additional labor, equipment, and business development resources. To that end, ask the firm for data on employee headcount at their portfolio companies at acquisition and at exit. Inquire into capital expenditures they have undertaken at their portfolio companies in recent years and key hires they have made to strengthen management teams. This will give you an idea of whether the firm typically supports the type of growth at their portfolio companies that will drive maximum value to your remaining equity share of the business.   

Once you have an idea of whether a PE firm has a history of supporting growth, familiarize yourself with their vision for growing your company by asking some of the following questions:  

• Do they see an opportunity to improve the leadership team? If so, did their model for the transaction budget for supplementing key personnel?  
• If new market penetration is a key cog in their growth strategy, can they cite portfolio companies they have previously helped enter that vertical?  
•  How does the firm approach add-on acquisitions? Some PE firms specialize in buy-and-build type strategies while others are more selective in their add-on requirements. Does their view of inorganic growth align with yours?  

• What is their average hold period? Do you feel it allows for enough time to accomplish the goals you have in mind for this next phase in your company?

4. What is the Fund’s History and Background?

Next, you will want to learn more about the fund itself—its culture, longevity, structure, life cycle, and future plans. Any serious buyer will want to visit the company and spend time with the management team (or at least the business owner) prior to making an offer. During these meetings, gauge whether you could envision yourself and your team working with the private equity group. Do you get the sense their culture and values align with your own? 

Ask the firm’s partners how long they have been working together and how many funds they have raised. Private equity is a competitive industry, with hundreds of funds competing for investors. In fact, most groups do not go on to raise second funds, much less third or fourth funds. A firm’s longevity speaks to its ability to make keen investment decisions, grow its portfolio companies, and generate outsized returns—all things of critical concern for a business owner retaining equity.  

Partnering with a private equity firm is sure to have a transformative effect on a business. Whether that transformation is beneficial or disastrous hinges on whether the company and PE partner are aligned strategically and culturally. Gaining clarity on the topics discussed above will help determine whether a private equity suitor can be a potential long-term growth partner.