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Five Key Questions to Consider When Seeking Private Equity Funding

Posted by Evan Heby, Service Industry Marketing Manager

In preparation for the first installment of NetSuite’s upcoming four-part webinar series on private equity, we sat down with Cheryl Vijjeswarapu East Coast Head of Private Equity – Oracle NetSuite, to discuss some of the topics we will cover in the first webinar, Private Equity Part 1: Market Trends to Watch. Vijjeswarapu has an extensive background working with a wide-range of businesses from start-up to public enterprise. She is also experienced working both with companies searching for investment and PE-backed businesses from her time as a consultant at Deloitte and her work in the investment advisory world. 

Q: What advice would you give executives considering Private Equity investment? 

A: I would start by asking some questions. First, what are your growth plans and at what rate do you plan to scale? What is your current funding structure? If you are using cashflow from operations to fuel growth, is it enough to match up with expectations along the time frame you wish? Are you in a competitive landscape where it is more advantageous to grow now vs. later?

Moreover, there are also sector specific questions - e.g. for retail businesses: are you a leader in a specific geography and do you require institutional capital to not only fund growth but also to provide the strategic relationships to open-up new distribution channels? As an example, e.l.f. Cosmetics was acquired by TPG (a PE company) which helped put them into a lot of big box retailers. It also depends on some of the less mathematical considerations, like are your executives ready to give up or share control? Are you looking for a liquidation event? Where are your key executives in his/her life and what are their goals? Does PE or bringing in any new shareholders match up with those goals?

Q: What are some of the signs that a business is ready for PE investment? 

A: Traditionally, PE firms look to invest in mature companies that are cashflow positive and that exhibit some market leadership in a segment. Recently, however, companies are starting to see PE dollars earlier– a lot of traditional buyout firms have created growth funds to get in on rounds where VC's are co-investing. Of course, this again depends on the sector, for SaaS companies, PEs are less worried about strong EBITDA and more concerned with recurring revenue. Each PE fund has their own investment mandate so what some firms consider too small of a company, another may consider the perfect target.

Alternatively, a company could be a good candidate for an add-on acquisition to a PE firm’s existing platform. One thing is for sure, PE firms will put all potential investments through a thorough diligence process. Companies should absolutely have their books in order and hopefully have a good system, like NetSuite, in place. Even if systems are not already in place, when a firm receives PE investment it is a good indication that they'll experience an inflection point in growth. Typically in the first 1-2 years they will move onto a system like NetSuite to help them scale and meet the growth thesis being driven by their PE firm.

Q: If you have multiple offers on the table from various firms, how would you recommend determining which offer is best for your business? 

A: In today’s market, there is a lot of capital out there. The best businesses likely have multiple buyers, whether it is a financial sponsor like a PE firm or whether it is a strategic buyer or corporation interested in acquiring their asset(s). My suggestion is common in today’s economy: DO NOT JUST LOOK AT THE VALUATION. It is much more important to get along well with your sponsor, to ensure your expectations for the future of the business, and how you'll get there are aligned. Don't just take the highest offer – consider the bigger picture. Hopefully you’re not getting wildly different views on purchase price, and it’s important to note that every PE firm is different, so make sure you understand their style. Are they prescriptive with a set of standard operating procedures? Or are they more hands-off and provide guidance without mandating?

In any event, ensure that you trust the team and the vision – it's a two-way street with management teams of the portfolio company and PE teams, so you must make sure you and your firm are on the same page.

Q: Who are the right stakeholders to hold conversations with potential investors & why? 

A: Definitely the board and shareholders, but beyond that a lot of PE firms will ask to talk to a level of management below or even two layers below the executive level. They are looking for a granular view into the business.

If the portfolio company allows this kind of access, it will greatly benefit your diligence process. However, a lot of portfolio companies will keep any potential investment tight-lipped so as not to startle or worry the employees. PE firms get a bad rap sometimes, and the knowledge of a potential investment may worry employees about their future with the company. The best answer is keep folks on a need-to-know basis, but make sure as the PE-firm does diligence on you, that you are also doing diligence on them to ensure they're the right capital partner. Think of it almost like a job-interview.

Q: Do you have any advice for businesses that are unsure if they are ready to start talking to potential investors? 

A: It's always better to start conversations sooner, rather than suddenly deciding you want to sell because you need the liquidity event for personal or business reasons. You will get a better purchase price if there are lots of folks looking at you, so get a great banker, with a great network and a track record in your sector. Today’s valuation multiples are very high relative to historical prices, so you are in a great position. If you have not thought about the long term – 5-8 year – goals for your company, including how you will fund it and what the competitive landscape is, your team should start formulating a long-term plan. At the very least, you will learn something new by engaging with potential investors, which will be useful at whatever point you do decide to exit.

If you’re interested in learning more, please click here to register for our webinar, Private Equity Market Trends to Watch, on July 24th at 10 a.m. PT.