You are always more comfortable when someone is speaking your same language, and you are going to be flattered when the former CEO from a giant competitor calls you to say how much he or she has always admired the way you do business. "Warning warning." "Danger danger, Will Robinson."
Here's where I remind you that private equity groups are the trans fats of the financial world - they are super sneaky, absolutely everywhere, and impossible to get rid of.
Private equity groups hire CEOs or executives in industries that they find attractive to lead investment efforts for them. Those CEOs then go back to old contacts, people they've met at trade shows, or competitors, and convince them that a direct sale to [fill in name of their PE group here] is the way to go.
A recent article from Middle Market Growth Magazine from April 2022 called "Follow the Leader" calls this phenomena the building of "executive networks."
One firm said, “The days of investment bankers taking a broad approach to marketing businesses are behind us. By bringing on people into an executive network and sharing those relationships with the intermediary community, it helps us to get looks at deals that are not going to be broadly marketed.”
Do you see what they are hoping to do here? They want you to answer the phone because the executive is calling and have a conversation about selling your business. They want to avoid an auction, competition, and the increase in valuation that comes with it.
I hope this sounds scary to a business owner. If it doesn't - let me tell you a little more. These execu-buyers are paid cash compensation and receive equity compensation in each company they invest in. Many executives also have significant bonuses based on performance targets and invest their own money to buy additional equity.
None of this is bad, but when a CEO calls you and says that he or she has always admired your business because of your unique capability, you should take a step back and eye the conversation skeptically. My guess is that this conversation has happened multiple times and whatever uniqueness this executive likes about your business, they have also found something interesting to like about another business down the street.
OK - Some Good Reasons for Executives
Am I just being cynical? I don't think a lot of private equity folks read my blog and most probably stopped after the trans fat comment - but just in case I have a few still with me... there are a couple of great reasons that hiring a former executive around an investment thesis makes sense.
- They know the industry - of course - and can give you great insight into which companies outperform.
- They make great resources during due diligence as you are trying to learn about a target company because they know what questions to ask.
- Many companies for sale don't have a transitioning management team and need a new CEO.
Some of the very best management meetings happen when a private equity group happens to have an industry expert on their team because then someone on the team asks really insightful questions and the sellers tend to relax a little bit because someone understands what they are saying. So, not all doom and gloom and sometimes, they can be very helpful.
The ROI on Executives in Residence
There is a reason that private equity is willing to invest in these executives with an eye towards getting a proprietary introduction to a business owner looking to sell. Every buyer wants a one-off transaction. They do not like auctions with multiple buyers because it forces them to pay top dollar. In today's market, top dollar valuations are still quite high and private equity is getting very creative in the ways that they will go to avoid competition.
If an executive you know, or you know of, calls and suggests that you sell, and you are considering it, act flattered and take down their contact information. Include that executive and their group in a process with a real investment banking advisor. If they are committed to the investment thesis, they will be disappointed to hear you are running a sale process, but will be excited to have an opportunity to buy your business. If they are not willing to go through the sale process, they were not interested in your business, they were trying to get a deal at your expense.