Aug 13, 2020

Selecting the Ideal Private Equity Partner: 5 Tips

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You’re ready to sell your business or bring on a major investor, have hired a knowledgeable investment banker to manage the process, and now you’re entertaining one or more offers from interested private equity (PE) firms.

Choosing The Right Private Equity Partner:

Choosing the right PE partner is one of the most critical decisions for any founder or CEO, and the relationship will be for the long haul. Before you sign up for the highest valuation offered, we’ve outlined five key considerations for founders and CEOs in choosing the right PE partner for your business.

1. Determine the resources the PE firm can offer your specific business.  In addition to ensuring the PE fund will have appropriate (and accessible) capital available after the closing, the right PE investor will have resources to help your business execute its strategic plan and maximize value.

Look at the gaps you need to fill in your business and flesh out exactly how a particular PE firm is positioned to help you bridge those gaps. For example, do they have a wide-reaching network or industry-specific contacts for developing partnership opportunities or relationships or certain expertise or transaction experience that address your business’s current needs, future plans, and desired cost savings?

You should also understand how they implement their growth strategies. Some PE firms will have more rigid protocols they expect all of their portfolio companies to adhere to, while others will take a more individualized approach on a company-by-company basis. Some PE firms are highly acquisitive, while others focus more on building from within each portfolio company. Analyze how their approach fits with your business.

2. Understand the management style of the PE firm.  Before choosing a PE firm, learn how each potential firm manages their portfolio companies, and whether their management style aligns well with yours. What will their level of involvement be with your business? Do they micromanage? Do they plan on replacing executive management? Or do they take a more hands-off approach? How do they communicate?

To help you assess management style (as well as the many other due diligence items we describe in this article), obtain references for other founders and CEOs who have partnered with the firm, including references of portfolio companies that weren’t successful.

3. Get to know the individual partners you’ll be working with.  While you may be drawn to the overall branding or general approach of a PE firm, you’ll work closely with only one or two partners. Get to know these individuals. Do you like them? Can you envision building a productive long-term working relationship with them? How well do your personalities and management styles mesh?

These are important questions to ask because you’ll be spending a significant amount of time together in the future. If upfront you find there’s poor rapport or your personalities or styles don’t match well, it’s probably a sign to keep looking for a better fit.

4. Evaluate the PE firm’s track record for businesses of your size.  Generally, you’ll want to assess the PE firm’s performance over the short- and long-term, and specifically with respect to businesses of your size.

Some factors to consider include the success of the PE firm’s funds during both strong and weak economic cycles (if they have sufficient history), the fund’s capital resources, whether the firm has experienced high turnover among its partners (related to point 3 above, if you find someone you are excited to work with but you find that partners don’t tend to stay on long-term, that could raise a red flag), and the type and number of transactions the firm has completed in your market-size.

5. Obtain a clear understanding of the fund’s investment horizon and exit strategy.  Make sure you know how long you have to execute your strategic plan. Having an investment horizon that is too short for your business could result in undue pressure to achieve revenue or earnings milestones that are unrealistic. Or, perhaps you’re seeking to remain involved with the business for a longer term, or you envision a quicker exit.

In any case, discussing the investment horizon with each prospective PE partner is needed to determine whether your mutual vision and interests are aligned. Most PE acquisitions where the founders remain involved post-acquisition are “second bite at the apple” opportunities (meaning the founders retain a minority equity stake in the hopes of obtaining a second return on investment with the PE acquirer when it subsequently resells the business or goes public).


Just as important as performing your due diligence on potential PE investors is having a knowledgeable M&A attorney experienced with private equity transactions. Linden Law Partners has years of experience advising businesses and their stakeholders on all aspects of sale transactions to private equity firms. Get in touch with us at 303-731-0007 to discuss your options.

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