What to Look for in a Private Equity Partner and When to Bring Them On

For established and profitable companies, partnering with a private equity firm is more often than not a prudent move IF you can find the right partner.  Bringing on a private equity partner can provide substantial advantages including wealth diversification to shareholders, valuable strategic resources, pattern recognition, and a deep and experienced network.  If it’s the right private equity partner, they become a trusted and totally aligned advisor peering around corners for things you may not be expecting which mitigates the risk of stumbling along your journey.  Despite the benefits, founders often grapple internally with daunting concerns such as:

1. With each passing year of growth, my valuation continues to increase, so why sell now?

2. Where else could I possibly invest the proceeds and earn as high of a return as I can in my own company?

3. What if the new partner disrupts the operations of my business?

4. Will a private equity partner shake up my company’s culture?

Concerns #1 and #2 are largely related to timing and risk diversification.  Yes, there is a meaningful chance that the value of your company will continue to increase with each passing year of growth even without a private equity partner.  However, no company is immune to existential and black swan threats such as geopolitical events, public health risks or economic shocks.

With the right partner, your odds of avoiding snags along the way and achieving your long term goals with fewer bumps and bruises dramatically increases.  When a vast amount of one’s financial net worth is tied up in a single asset, it’s sensible to seek out some degree of diversification.  Your company might be the highest returning and most certain asset you can imagine, but portfolio concentration can lead to unintended consequences.  We’ve found through working with many founders that diversification leads to more balanced risk-adjusted decision making which ultimately makes the business stronger.

You can dramatically de-risk concerns #3 and #4 by conducting your own diligence before you select a partner.  Speak with other founders from companies that the PE firm previously worked with including the ones they don’t offer up as references.  Spend time socializing with multiple people at the PE firm over an extended period of time to gather a sense of their style and demeanor.  Make sure you have strong alignment on your company’s strategic goals and key growth vectors before consummating a deal.  The partner who offers you the highest valuation isn’t necessarily the best partner stylistically and strategically.  The right partner for your business may challenge previous conceptions in a healthy manner, but they shouldn’t damage your culture or harm operations.  Unless you’re selling 100% and walking away, over-index on the value you ascribe toward the right cultural and strategic fit in a private equity partner.

Vuori CEO and founder Joe Kudla wasn’t looking to raise capital or work with a private equity firm when Norwest first approached him to make an investment in his leading performance apparel brand. He had many of the same common concerns that most founders have when considering whether to bring on a partner. Joe told us, “By not being in a position where we needed to raise capital, we had the flexibility to take our time in selecting a partner who believed in our brand, vision, and values.  In these turbulent economic times, it is particularly reassuring to have Norwest in our corner as both a thought and capital partner to help Vuori weather the macroeconomic storm.”

Just this week, SmartSign CEO and President, Blair Brewster said, “It’s certainly less overwhelming, knowing that we have a large, steady and experienced team from Norwest behind us during these times.”

If you do your diligence to ensure you’re selecting the right partner and your business is running relatively smoothly, you’re in great shape to bring on a private equity partner and start benefiting from the personal diversification, strategic resources, expansive network and pattern recognition.

Within Norwest’s Growth Equity business, we think deeply about who we partner with and spend an extraordinary amount of time with key individuals at a company before closing a transaction to maximize the odds that we have strong philosophical, cultural and strategic alignment on how best to grow the business.  We’re proud and feel very fortunate to have partnered with many exceptional founders and CEOs.  If we feel there isn’t cultural and strategic alignment, we’ve never been afraid to self-select out of what we originally thought might be a solid investment opportunity.  Life is too short, and no amount of value is worth partnering with someone who isn’t the right fit.