Is private equity right for you? That was the subject of a session at last month’s ACCM in Orlando spearheaded by a trio of experts — Carson Biederman, managing partner of Mustang Group; Don Steiner, managing partner of Webster Capital and founder of Cornerstone Brands; and Helen Yang, a principal with American Capital.
For starters, Biederman said you have to consider personal goals– liquidity, control, freedom/time commitment, and willingness to take on a business partner. Then there’s the company goals–funding growth/acquisitions, market and competitive position, attracting senior managers, expanding into new categories/channels, and rewarding employees.
Looking at liquidity options, Biederman noted that a strategic buyer typically buys 100% of equity for cash. The buyer may use savings from consolidation to help fund purchase, and it may pay highest price. The risk for employees? Relocation and new management. “You need to evaluate cultural fit vs. take the money and run,” he said.
Debt recapitalization involves no give-up of equity. Lenders are less willing to allow cash out and there’s higher financial risk associated with the leverage and more stringent covenants placed on company by the lender.
An initial public offering requires scale of revenue and earnings. Companies with less than $500 million in revenue should exercise extreme caution: it’s a poor route to liquidity. Cash raised will typically remain in the company for growth. Then there’s the pressure on quarterly earnings expectations, and the significant costs of public reporting (Sarbanes-Oxley).
Venture capital funds high-growth businesses. There’s typically no cash out to owners – the company issues shares. And it’s usually a minority investment—the owner keeps control. On the down side, it’s hard to find VC firms who will invest in consumer direct.
There are billions of private equity dollars looking for an intelligent home. How do you evaluate a potential private equity partner? In addition to chemistry category expertise, and common goals/strategy, Yang advises seeking a value-added partner. For instance, have they invested in companies in your space before? Yang said the timeframe in a private equity deal is six to nine months from preparation to close.
The M&A market has seen softness, as companies have been down in valuations. Private-equity firms are active, but cautious, Steiner said.
Still, “private equity is the most likely path to liquidity for direct marketing companies,” he noted. If things don’t work out, Steiner said: “Sell the company or change management.”