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Questions You Should Ask The PE Firm During Management Presentations

There is this moment in a management presentation after everyone says hello, nervously picks a seat, and explains what city they are from, that the potential buyer gives a little talk about themselves.  If that buyer is a private equity group, the presentation can look and feel very different than that of a strategic acquiror.  They will talk about their fund, that fund’s investors, and will inevitably end with “do you have any questions for us?”  

The management presentation is an excellent time for a seller to get to know buyers, and should be seen as an opportunity to begin to understand their differences beyond purchase price and deal structure.  To that end — you should ask the private equity buyer questions!   

If you have never sold a company before, it might be difficult to think about what types of questions these not-so-straightforward buyers might need to answer.  

Here are a couple of ideas to get things kicked off in case you need some ideas:

* How often do you visit your portfolio companies? Or — Do we visit you?

Why is this important?  You care about this because different buyers have different philosophies about how “hands on” they are with their portfolio companies.  Some never visit, some visit weekly.  You will want to know.  The “do we visit you?” question is important because some PE groups like their portfolio companies to attend sessions at the headquarters.  This can be fun if it’s annually in say, Miami, but might be less fun if its quarterly in Cincinnati.  

* How big is your fund and where are you in its lifecycle?

Why is this important?  The size of the fund is honestly not that important in the grand scheme of things and it probably came up in the first 10 minutes of the meeting.  All private equity guys (and some gals) have some deep need to talk about how big their fund is.  Weird Freudian power move?  Perhaps, but we can discuss that in another blog.  The only reason you may care about the size of the fund would be to determine the relative size of your investment within it.  If you are a very large investment for them, you can probably expect more attention and the reverse is true.  If they are on their second, third, or fourth fund, you might want to see if the size of the funds have increased.  This generally means that investors have  liked how this group has performed and they were able to raise more capital as they went on to subsequent funds.

Probably more interesting is the question of where are they in the lifecycle of their fund.  Did they just raise it?  This means that they will be more patient in holding investments.  Is this the last investment they are making in this fund?  Well, then you can probably expect a shorter hold period (3 to 5 years).  

* Are there other resources the firm has to deploy for its portfolio companies?

Why is this important?  On a positive note, many groups bring resources with them including relationships with insurance companies, banks, or recruiting agencies that can be a benefit or a cost savings.  In addition, they often hold CEO roundtables where they share best practices.  Some groups even have in-house personnel that assist portfolio companies with online marketing or technology.

* What are there reporting requirements?

Why is this important?  This one is pretty self explanatory but it’s going to be important to both you and your team.  What do they need to see and how often?  Some only want financial statements and some want a “dash board” of key metrics.  Some want the equivalent of an entire board book every month or more.

* How do acquisitions fit into your growth strategy?

Why is this important?  All financial buyers are focused on growing their portfolio companies.  Many of them will do this through a combination of organic growth (you just keep doing what you’ve been doing) and acquisitions.  If acquisitions are a part of the picture, you as the manager of the platform company, might be responsible for finding targets, integrating businesses, combining CRMs, multilocation management, or a whole host of things that you have never done before.  Best to know that up front.  If the PE group is all about acquisitions, you might also ask where you fit as part of that larger strategy.  Are you one part of a “vision” they have?  Do you like that vision?  If, for example, you were a large animal vet in rural Wisconsin and you were suddenly merged with a bunch of City Cat Doctor businesses, you might understand the investment thesis, but you might also not be happy long-term (unless the annual meetings were in Miami — then…. perhaps). 

* Can we call your former CEOs/portfolio company managers?

Why is this important?  It might feel odd to ask for references from these snazzy looking people you’ve just met, but just lay the ground work now and if you select them as the buyer you like, then you can follow through. They shouldn’t hesitate to give you names of former CEOs. These people should be their best spokespeople. Believe me, they are going to go through every nook and cranny of your underwear drawer during due diligence, you should have no qualms talking to those people that know them best as owners.

* How do you finance your transactions?

Why is it important?  I’m going to level with you here — this one isn’t all that important because whatever they say in this meeting cannot be believed.  You should ask it though, to get a general understanding on how they feel about debt at the portfolio company level.  Listen for the ones that say things about not wanting to “over-lever or over-burden” the company.  You are looking for signs that they have plenty of money, good banking relationships, have done deals before, and know what they are doing.  Those are all good things.  Most of the time, they are just telling you what you want to hear,  but they are still good things.

* What are your equity and non-equity compensation tools?

Why is it important?  A little Miss Manners advice in this section — do NOT just come out and ask what they are going to pay you post transaction.  That’s a little over the top.  You can however, ask them about the tools they have to compensate management teams.  They have a lot of leeway to compensate key personnel and they generally like to do it.  Some will put together option pools for management and very attractive bonus structures based on hitting specific growth targets.  They like to talk about this because the plans they put together align interests.  

* Do you charge a management fee?

Why is this important?  So this might come as a surprise — some PE groups charge their portfolio companies a management fee.  Basically, a fee paid to the PE group for their “management expertise”.  It helps them keep the lights on and pay rent, buy more ties, etc.  As a seller, it shouldn’t really bother you as long as it doesn’t impact the calculation of earn outs or other post-transaction consideration.  For some sellers, it just rubs them the wrong way so better to know about it up front.

These are just a few questions that can get you started and should apply to almost all financial buyers.  Your investment bank can help you out by providing a brief summary of each buyer before the management presentation that will go through some additional specifics on each of the firms.  That will enable you to ask more questions tailored to each one.  Approach these meetings like an interview.  These are groups with whom, if you are rolling equity, you could be spending 5 to 7 years building an asset together. 

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