He aborted the plan. "This is not us," he recalls telling his partners. "We'll no longer be able to spend our Monday-morning team meetings talking about all the great things we did last week and plan to do this week. We'll be talking about burn rates." He envisioned spending his time managing the investors instead of running the business. "We will hate these guys," he said. Instead, the company decided to plow its profits back into growth, and "we continue to grow quite well," Stoecker says--about 20 percent a year.
Stoecker may have been able to grow faster with outside investors, but given his goals, he probably was right to abandon his pursuit of outside capital. Although private equity investors vary in their level of managerial involvement with a company--some are more hands off than others--it's definitely not going to be zero. "If all you want is money, there are cheaper ways of getting it, like going to a bank," says Walter Kortschak, managing partner at Summit Partners, a private equity firm with offices in Boston, Palo Alto, California, and London. The key question to consider, he says, is this: "Is this about you, or is it about the company?" If, like many entrepreneurs, you have a hard time separating one from the other, then private equity probably is not the way to go.
Sort out in advance exactly how much control you're willing to give up. Are you willing to hear that a key colleague who helped build your company is not the right person to take you the rest of the way? Management is one of the first things equity investors take a hard look at, and they often seek to bring in their own people. How important is the quality of connections to potential clients or companies to acquire that the private equity investor brings to the table? How often would you prefer to communicate with them?
4. You're not ready for due diligence
Allen Gray knew he needed investors. His business, BMC Products in Chicago, made tubular components for automobiles, such as spare-tire holders, as well as tubular office furniture. The business was growing fast and Gray and his 120 employees were having a tough time keeping up with the demand. An infusion of capital not only would put some cash in Gray's pocket but would also give his company the means to keep growing. A business broker hooked him up with a potential investor, which Gray describes as "a good-size private equity firm in the East that was interested in getting into the home office business and the auto aftermarket business." The investor soon delivered a letter of intent, for an amount in the multiple millions and 80 percent equity. "I'm a guy who grew up delivering newspapers and worked my way through college. When I saw a piece of paper with that many zeros on it, I got very excited," he says. "Being a multimillionaire sounded very good to me."
The offer was nonbinding, and the investor started conducting due diligence. Due diligence, of course, is the term that investors use to refer to checking out every aspect of your business--a serious vetting to give them the confidence level that you're a good investment. It's not a lot of fun, says Kortschak: "I've never seen an entrepreneur conclude that the diligence process was not thorough, or think, 'Boy, that was super easy and super efficient."
In Gray's case, due diligence, which was supposed to take 90 days, stretched out for almost seven months. The investor always had at least one person on Gray's premises, researching and asking questions, and often sent teams of two and three people. They wanted loads of data. They wanted to interview key customers. Gray spent a lot of time working with the investor and less time managing his company. "Bottom line is I took myself off my business, and I didn't have a strong management team that could fill in for me," he says. "Costs got out of line, orders didn't ship on time, and I started losing money."
As the business suffered, the would-be investor kept lowering its price. Finally, at the end of seven months, Gray called off the deal. Several months later, he struck a deal with another buyer at just over 10 percent of the initial offer. "It really ate me up," says Gray, now an investment banker who spends quite a bit of his time brokering private equity deals. "I built a successful manufacturing company from nothing, and I made a total shambles of selling it to a private equity group. I lost everything."
Obviously, a reputable investor doesn't want your company to be ruined by the due diligence process. "The last thing anyone wants is for the process to consume the entrepreneur to the point that the business gets impacted," says Kortschak. On the other hand, even in the best of circumstances, handling the details of due diligence is going to take time out of your week--you need a good management team that can pick up the slack. "You're going to get distracted," says Gray.
There's another type of depth you want to have in a deal: multiple offers on the table. Since Gray had just one interested buyer, he could not credibly threaten to go elsewhere. Says Gray: "One buyer is no buyers."
