A CFO’s Life in Private Equity – Part III - Survive The Transition

There is no rest for the weary, or at least for the finance chief in the midst of a transaction with a private equity group. Now that you know the ground rules of private equity and have learned how to get your financial house in order the fun(d) is just getting started. In Part III Kevin describes the preparation required for and the art of negotiating. Enjoy Part III with Kevin.

At a very high level, the steps of a private equity transaction looks like this:

  • Make decision to sell company
  • Engage a qualified sell-side firm to represent you
  • Prepare the Confidential Information Memorandum (CIM)
  • Meet a bunch of potential private equity firms
  • Select private equity firm
  • Exchange a lot of information
  • Negotiate the deal
  • Close deal

The common sticking points in this simple timeline are:

  • Engaging the sell-side firm. There are a lot of hungry sell side advisors who promise that they can properly represent you and offer a long list of buyers that they are connected with. Make certain you find a sell-side firm that is the right fit. Also, my advice to every CFO:

Prepare your own CIM. While the sell-side advisor can make it look nice, you are far more likely to know the value levers are in your company, what the competitive landscape looks like, and what potential bolt-ons could be added to your company. The stronger the information and roadmap, the more likely you are going to get a fair valuation, relatively stress free.

  • Valuation. Do your homework. My favourite representation from a sell-side company was promising the vendor that they were going to receive fourteen times (read: 14 times) EBITDA from someone buying their company. No one makes money buying a company at that valuation and it was bad for the sell-side advisor to suggest it. Part of your role is to advise your owners what is a reasonable valuation for your company.
  • Exchanging a lot of information. A good sell side advisor will help you set up a solid data room and vet the information requests from the private equity firm and their representative. When your advisor is good, the requests are relatively reasonable and there is a valid reason provided as to why they are looking for the information. But then it goes bad, it is usually really bad. Requests will be a mix of mad rush, long time between communication, and no structure as to how things are to be provided. Many times the CFO or Controller is left thinking that when they think that you can’t provide anything more, there is yet another request! You will also find out that a lot of people don’t know how to set up a data room…
  • Negotiate the deal. The reality is that most people aren’t very good at negotiating…but the best prepared always wins. The process itself goes through some very intensive and some very slow moments and you need to remain calm during all of it. If something doesn’t go your way, don’t worry - you don’t get upset if you have one bad inning in baseball. Same thing with selling a business. Your objective abilities as a finance executive will be valuable to the owners of your business. Know what your bottom line number is and what you can live with and without. Each private equity firm will have their own twist to the deal and you need to be able to understand what that means to your owners and how to negotiate what you are willing / not willing to deal with.

The first week after close is quite often the honeymoon phase. But everyone agreed to the deal to grow the business and generate returns. The next phase of onboarding and doing business with your new dance partner can be challenging. But a year after the close of the deal, both the company and the way it operates can be significantly different.

Continue to Part IV


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