Private equity insider

	SIZING UP A PE PARTNER

A business owner should approach the potential transaction by doing as much due diligence on the interested PE funds as those funds will do on his business. Consider these three key factors when evaluating a PE partner:

	Chemistry

Most PE funds are involved at the board of directors level, while some plan a more “hands-on” role. If the business owner is going to remain CEO of the company after the transaction, he should understand how the PE fund plans to operate and attempt to partner with PE professionals with whom he has genuine rapport.

	Finding a value-added partner

Are the PE fund's professionals more than just financial engineers? Does the PE fund have experience with multichannel and direct marketing businesses? Can they help with new ideas in Internet marketing, name acquisition, or new promotional channels? Does the fund have the strategic expertise and industry relationships to place valuable directors on the board? Will the PE fund support acquisitions to grow the business? What is the PE fund's exit strategy and what is their time horizon?

	Track record of success

The PE fund should be able to show substantive realized returns on its prior investments to warrant consideration. Have previous sellers/CEOs been happy with the relationship?

References from other business owners in the PE fund's portfolio are invaluable to understanding how the PE fund interacts with its portfolio companies and management teams. Pay particular attention to references from previous sellers who have already exited, who no longer have any reason to withhold potentially difficult perspectives.

In determining if a private equity investor is right for a business, the owner should consider his or her personal life situation and time horizon to determine if a PE investor is the best solution. Is the business owner at a stage in life where asset diversification has become a priority? Is the owner/CEO willing and able to continue in that role for several more years after a transaction, and willing to function in an environment where control has been ceded to the PE fund? Is there a growth scenario for the company that could benefit from an influx of capital and strategic guidance to allow the business to expand?

	PREPARING FOR A SALE TO A PRIVATE EQUITY BUYER

A multichannel business owner should proactively prepare several years in advance for a potential transaction to make the company as attractive as possible. Building a first class management team and fine-tuning the business model now will drive significant value during a sale process.

	Fine-tune the business model

PE firms like direct marketing businesses that have growth in multiple selling channels — be it catalog, Internet, stores, magazine advertising, and/or DRTV/radio — because channel diversification usually reduces business risk. Business owners should strengthen their marketing and merchandising organizations based on a tightly developed understanding of variable costs and marketing contribution.

Aggressively continue customer acquisition subject to rational objectives, such as six-month breakeven on the worst performing segments. An intense focus on execution several years in advance of a sale process will optimize value in a transaction.

	Round out an effective management team

PE funds are less excited by a “one man show,” or a business run by a dominant CEO/owner. The rationale is simple: If the owner loses focus after monetizing his wealth or dies, who will step in to run the company? Develop a succession plan and a well-rounded management team with powerful executives who understand their roles and the company's strategic vision. If you've been debating internal changes, don't wait any longer! The time is now. A sophisticated CFO who is comfortable operating in a leveraged environment will further enhance the company's appeal.

	Institute proper controls

The one- or two-year period prior to beginning the sale process is the time to ensure that the company's financial reporting is appropriately managed. PE funds will dissect every aspect of the company's financial statements, and the quality of accounting must be of the highest order. The seller should complete annual audits and develop strong internal financial controls, both of which will pay significant dividends during a sale process and make the transaction smoother for the seller.

Sophisticated PE funds understand the value of the multichannel model, and many funds are solely focused on acquiring businesses in this industry. A savvy PE fund can provide owners with unique strategic and financial assistance to build their businesses and help them implement succession plans.

A business owner who understands and appreciates the private equity model — and is committed to running a tightly orchestrated sale process — will be rewarded with significant liquidity. Not to mention a substantial and tasty “second bite at the apple” down the road.

---

David Solomon is co-CEO of Lazard Middle Market (www.lazardmm.com), a New York-based investment bank.