Adding a Capital Partner: a Win-Win For Owners and Management

By December 30, 2019Business Transition

As a key executive in a privately-owned business, you may find yourself feeling differently than the founder/owner about the direction the business is taking. After you’ve put a good chunk of your career into helping the company grow, running up against resistance to your vision can be frustrating.

Disagreements can be based on a host of scenarios: passive owners, multiple owners with competing priorities, resistance from family members (even ones not involved in the business), a desire to move faster, unwillingness or inability to invest in growth, ownership that’s getting older but hasn’t made a succession plan, etc.

So how do you take the business in a different direction?

For many executives and management teams, it means bringing on a capital partner like a private equity (PE) firm. A PE firm can help you achieve your goals for the business, provide you equity in the company – and ensure the owner gets what he or she wants, too.

When you work with a PE firm, you have a couple of options:

  1. The owner can take some chips off the table (by selling part of his/her ownership) while staying involved in a more strategic or limited role. This opens equity ownership opportunities for the management team and potentially allows the owner to refocus on the area(s) of the business that excite him/her most.
  2. The management team can partner with a private equity firm to buy the owner out completely, establishing or increasing equity in the business – and getting access to the capital needed to take the business to the next level.

Start by finding the right partner.

Step one should always be research. Not all private equity groups are created equal, so do your due diligence. Talk to them, connect with other companies they’ve worked with, read about them online – get all the info you need to ensure you’ll have a partner that fully understands your business, your industry and its specific challenges, and most importantly, is aligned with your goals.

Look for a PE firm with a strong network of sales and industry contacts, supportive resources, management- and board-level talent, and solid relationships with financial institutions. Try to find a firm with a long-term view and the singular goal of unlocking your company’s full potential by spending on things like sales, marketing, product development, management talent, capital expenditures and acquisitions. In short, don’t look for an acquirer: focus on finding a partner.

Position partnership as a solution.

Once you’ve landed on the right capital partner, the next step is approaching the business owner(s) with your idea. This can be a pretty sensitive conversation: no owner wants to feel pushed aside, or like something has been happening behind their back. So start the conversation by focusing sincerely on what they want. Get a sense of their vision for the future, then position a private equity investment not as a threat, but as a solution for achieving those goals.

“If they haven’t talked about their succession plan or exit strategy, start there,” says Jessica Borowy, Vice President. “Whether or not bringing on a private equity partner is the right solution, they owe it to you and themselves to have a plan in place. What’s their vision for the future of the business, and who do they want to run it if and when they’re unable to do so? Do they have a plan for when they want to retire? Would a phased retirement be attractive, where they can step back a little, but still keep some skin in the game? Do they want to put enough money in their pocket for retirement while sticking around to see more growth – without having to invest in that growth on their own?”

Once you’ve talked about their goals, you can let them know you’ve been thinking, too, and present them with your ideas. If you’ve been a key driver of strategy and growth, say so, and have a frank discussion about where you can take the business and what you need to make that happen. If you get push-back because the owner isn’t willing to make big investments, present the option that allows them to stay in the game and get the money they need to grow: a partnership with a private equity firm.

 Play up the benefits to the owner – and to the business.

A capital partner can take the business to the next phase of growth. It can allow the owner to reward loyal employees with equity. And it can mean seeing their legacy grow and thrive – without having to risk their own money or do too much heavy lifting themselves.

Enabling growth is another big plus. As an owner, it can be tough to take on the debt needed to push through major improvements. But a capital partner can do things like upgrade facilities and/or optimize layouts, help with strategic acquisitions, hire additional talent, and install new technology systems – all improvements that could force an owner to take on a lot of debt, and a significant amount of risk.

“We take risk away from the owner,” Jessica says. “Often these businesses don’t grow because the owner isn’t willing or able to invest. That’s understandable, because in many cases, most or all of their personal wealth is tied up in the business. Bringing us in gives them the chance to do things they couldn’t do on their own. And even if there’s a downturn, our support means the company can weather the storm.”

Capital partners bring more than just money to the table: they bring expertise and resources. So, for example, when it comes to identifying strategic acquisitions for the company, the CEO and management team don’t have to spin their wheels doing time-consuming research and outreach. A private equity firm can look for and vet corporate development opportunities on their behalf so management can focus on running the business.

The goal of any private equity firm is to make the business better. ORG focuses on doing exactly that by partnering with capable management teams and making significant investments that can greatly improve company profitability and, in turn, market valuation. It really is a win-win for everyone involved.

Thinking about your options? Let’s talk.

Need help meeting the goals of your current ownership team and achieving your own vision at the same time? ORG could be the partner you’re looking for. Get in touch with us at 512.320.4086 or inquiries@orgroup.com  to find out how ORG can help you take your company – and your stake in it – to the next level.