10 TIPS FOR WORKING SUCCESSFULLY WITH A PRIVATE EQUITY INVESTORSOPHIE MANIGART AND MIGUEL MEULEMAN

1. Why do you need private equity (PE)?

2. Look for the right type of investor

3. Do your due diligence on the PE investor

4. Prepare your company

5. Do not search for PE when you run out of cash

6. Understand the contract

7. Don’t be too greedy

8. Who are you going to work with from the PE firm?

9. Be open after the investment

10. Prepare for a rollercoaster

10 TIPS FOR WORKING WITH PRIVATE EQUITY

WHY DO YOU NEED PRIVATE EQUITY?

1The first question you should ask is: “Why do I need private equity?” What are the specific goals you want to achieve? The type of investor you should look for depends on the goals you have set.

PRIVATE EQUITY MAY BE USEFUL IN A WIDE VARIETY OF SITUATIONS LIKE:

• REPLACING SHAREHOLDERS. This might be relevant in a situation of succession (e.g. you want to buy out brothers and sisters who are non-active shareholders). In some cases, you might want to buy out an initial investor who provided capital (for example, a parent company, or a secondary buyout situation). When the capital is used to replace shareholders, no additional funds will be injected into the company. Of course, replacing shareholders can be combined with providing growth capital to your company.

• PROVIDING GROWTH CAPITAL TO YOUR COMPANY. Your firm needs additional capital to grow, and other options (e.g. debt funding) are depleted or additional equity is a condition for obtaining more debt. Funding can be used to invest in (for example): international expansion, business development, management systems, infrastructure, or to acquire other companies (for example, to support buy-and-build strategies).

WHY DO YOU NEED PRIVATE EQUITY?

1• REALISING A TURNAROUND. When a company runs into financial

difficulties, new equity might be needed to revive the company.

SECONDARY GOALS MAY BENEFIT FROM PRIVATE EQUITY

• As an intermediate step towards a new governance model (e.g., before selling the company). Private equity companies can prepare a company for an exit by installing sustainable systems and practices. Additionally, they might help boost the company’s sales, making it more attractive to a potential acquirer. This will increase the value of the company before it goes on sale.

• As a way to access valuable intangible resources (in addition to money), such as a further professionalisation of your company.

WHY DO YOU NEED PRIVATE EQUITY?

LOOK FOR THE RIGHT TYPE OF INVESTOR

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LOOK FOR THE RIGHT TYPE OF INVESTOR

THE PRIVATE EQUITY LANDSCAPE IS POPULATED WITH VERY DIFFERENT SPECIES:

• ‘PURE’ INDEPENDENT PE FUNDS raise money from third parties (like institutional investors) to invest in shares of private companies. They typically have an investment horizon of 4 to 6 years: they need to exit their investment by a certain date, because they are required to return funds to their investors. There are some exceptions to this general rule. Evergreen funds (e.g. GIMV in Belgium) have no strict deadline to exit and, therefore, might have a longer-term investment horizon. Independent PE funds have fairly high return requirements, and strive to assure this with high levels of professionalism.

• FAMILY OFFICES. More and more wealthy families are setting up a family office to manage their wealth professionally. Some explicitly focus on providing private equity. They often have a longer-term investment horizon, and their return requirement might not be as high as that of independent PE funds. There are many differences between family offices. Some of them have adopted the private equity investment model, whereas others invest more on an ad hoc basis. Be aware: they often operate differently.

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LOOK FOR THE RIGHT TYPE OF INVESTOR

• GOVERNMENT-RELATED INVESTMENT VEHICLES. The main goal of these investors is to support economic activity and to retain local employment. Therefore, they often have longer-term investment horizons, and they will have lower return requirements, but there might be other strings attached. They typically act more like a silent partner.

• CORPORATE INVESTMENT FUNDS are investment vehicles set up by large corpo-rates like banks or pharma companies. Bank-related funds aim to offer a wider range of financial services to their clients, while corporates aim to get a window on new technologies. Therefore, if their strategic goals are achieved, they are somewhat less focused on financial returns. Their investment window might be longer than that of independent funds, and their corporate network might be especially beneficial.

EACH TYPE OF INVESTOR HAS DIFFERENT GOALS AND OBJECTIVES:

• Understand the investment goals of the investor you are targeting. Key questions to ask include: 1) what is their investment time horizon 2) to what extent do they expect to take part in decision-making 3) what are their return requirements 4) how risk averse are they 5) what do they bring to the table, besides money?

• Make sure your and their goals are aligned.

DO YOUR DUE DILIGENCE ON THE PE INVESTOR

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DO YOUR DUE DILIGENCE ON THE PE INVESTOR

EVERY PE INVESTOR WILL DO A THOROUGH DUE DILIGENCE ON YOUR COMPANY AND YOUR MANAGEMENT TEAM.• Be prepared to be transparent on all issues your company is dealing with

(e.g. legal issues, pending claims, …). Make sure your financial accounting is up-to-date and reflects reality. You want to avoid negative surprises during due diligence, as they could harm trust and, ultimately, become deal breakers.

• Expect PE investors to check your personal credentials through reference checks in your professional and personal networks.

WHEN YOU SEARCH FOR PE, YOU SHOULD ALSO DO YOUR DUE DILIGENCE ON THE PE SOURCES YOU ARE TARGETING:

• Not all PE firms have a sound track record or a perfect reputation. Talk to entrepreneurs about their experience with the PE firms you have in mind. And don’t talk only to the entrepreneurs the PE firm refers you to. Intermediaries are also an interesting source of information.

• Try to find out how these PE firms act in adverse situations, when not everything is going as planned. How tolerant are they for slippage? How quickly do they change the management team? Do they get more involved operationally?

ALWAYS CONSIDER ALTERNATIVE INVESTORS

PREPARE YOUR COMPANY BEFORE APPROACHING PE INVESTORS

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PREPARE YOUR COMPANY BEFORE APPROACHING PE INVESTORS

• Set up a data room with all important information, such as contracts with customers, suppliers and employees, legal documents, IP, etc.

• Streamline legal structures, if necessary. Avoid including unrelated (private) activities as part of your company (e.g. your apartment at the coast, …).

• Consider what to do with real estate: will it stay in the company, or do you want to transfer it to an unrelated entity before new shareholders come in?

• Settle claims with customers, tax authorities, …

• Professionalise your management team. Make sure your company is not dependent on a single person who owns all the contacts with clients.

• Know the underlying dynamics of your business lines, and how this translates into financials. For example, what are the margins for different types of customers? What is the customer acquisition cost, and what is your customers’ churn rate? What is the ratio of one-off contracts to repeat business?

IF YOU LACK THE EXPERIENCE TO DO ALL OF THE ABOVE, BE PREPARED TO HIRE PROFESSIONAL ADVICE

DO NOT LOOK FOR PRIVATE EQUITY WHEN YOU RUN OUT OF CASH

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DO NOT LOOK FOR PRIVATE EQUITY WHEN YOU RUN OUT OF CASH

When you run out of cash, it might be too late to search for a private equity investor. Completing a full investment cycle, including preparation, can easily take 12-18 months.

When you run out of cash, your negotiation position will be weak and you run the risk of being squeezed out.

NEVER SIGN A TERM SHEET OR A CONTRACT THAT YOU DO NOT FULLY UNDERSTAND

6Don’t take “that’s how we work…” as an answer.

Contracts often contain legal ‘mumbo jumbo’, which might not look important at first sight, but could have severe implications at a later stage. Every word is important - ‘the devil is in the detail’.

Make sure you understand what will happen in good and in bad times. Ask yourself whether the risks are well-balanced.

• Discuss the exit expectations upfront - how the PE investor will expect to exit and when.

Ask for professional legal and financial advice from parties with experience in PE deals. Don’t forget: if you pay peanuts you might get monkeys.

NEVER SIGN A TERM SHEET OR A CONTRACT THAT YOU DO NOT FULLY UNDERSTAND

DON’T BE TOO GREEDY

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DON’T BE TOO GREEDY

DON’T FOCUS EXCESSIVELY ON THE INITIAL VALUATION • Other deal terms may be more important (e.g. liquidation rights)

• Understand how the different shareholders will be compensated in good and bad scenarios (i.e. at low and high exit valuations)

WHEN YOU PUSH FOR A VALUATION THAT IS TOO HIGH, THE OTHER TERMS WILL USUALLY NOT BE ENTREPRENEUR-FRIENDLY

A HIGH INITIAL VALUATION ALSO PUTS A LOT OF PRESSURE ON YOUR COMPANY. FOR EXAMPLE, YOU MIGHT NOT BE ABLE TO CONTINUE TO INVEST AS YOU’D WISH.

EVALUATE THE DEAL TERMS HOLISTICALLY

• Both financial and control rights are important

• Make sure to negotiate a ‘right of first refusal’ and, if possible, negotiate a call option to buy back the investor’s shares at a predetermined price formula

BUT DON’T BE TAKEN ADVANTAGE OF EITHER!

UNDERSTAND WHO AMONG YOUR PE INVESTORS YOU ARE GOING TO WORK WITH ON A DAILY BASIS

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UNDERSTAND WHO AMONG YOUR PE INVESTORS YOU ARE GOING TO WORK WITH ON A DAILY BASIS

THE INVESTORS NEGOTIATING THE DEAL ARE NOT NECESSARILY THE ONES WHO WILL BE SITTING ON YOUR BOARD.• Check the credentials of the partner(s) or investment manager(s)

who will be sitting on your board.

ACCEPT AN INVESTMENT ONLY IF YOU TRUST YOUR INVESTORS AND ARE CONFIDENT THAT YOU WILL BE ABLE TO FIND MUTUALLY AGREEABLE SOLUTIONS IN CRISIS SITUATIONS.

PE INVESTORS OFTEN ADD INDEPENDENT BOARD MEMBERS AS WELL.

• These might be very valuable if they have the right experience and expertise, or a relevant network.

• Make sure you have a say in who the independent board members will be.

BE OPEN AFTER THE INVESTMENT

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BE OPEN AFTER THE INVESTMENT

DON’T HIDE NEGATIVE NEWS.

COMMUNICATE AND DISCUSS ALL RELEVANT MATTERS IN A TIMELY WAY.

PROVIDE SUFFICIENT INFORMATION FOR INVESTORS TO UNDERSTAND YOUR COMPANY.

INVESTORS DON’T LIKE SURPRISES – ESPECIALLY BAD ONES.

PREPARE FOR A ROLLERCOASTER

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PREPARE FOR A ROLLERCOASTER

WORKING WITH PE INVESTORS IS NOT ‘BUSINESS AS USUAL’

YOU AND YOUR COMPANY WILL BE CHALLENGED ON ALL ASPECTS• Accept that others might sometimes know it better than you do

• Be prepared to share decision-making and to delegate authority to experts

DARE TO SET YOUR EGO ASIDE AND WORK IN A COLLABORATIVE WAY. TREAT YOUR INVESTOR AS A PARTNER.

THERE MIGHT BE VARIOUS REASONS WHY AN INVESTOR ULTIMATELY DOES NOT INVEST. TRY TO UNDERSTAND WHY AND ASK FOR FEEDBACK. CONSIDER ALTERNATIVE OPTIONS.

• Some companies will not fit the PE investment model. For example, your company might be too small or lack a competitive advantage, your market might be declining, and so on.

AND ENJOY THE NEW EXPERIENCE!

THANKS TO OUR PARTNERS

THANKS TO THE GIMV PRIVATE CHAIR

THANKS TO OUR PARTNERS OF THE CENTRE FOR MERGERS, ACQUISITIONS AND BUYOUTS

READY TO TAKE YOUR OWN COMPANY TO THE NEXT LEVEL?

Then join other owners & entrepreneurs from different sectors and backgrounds in one of the following programmes:

• SME Excellence: (further) professionalise your business

• Venture Capital & Private Equity: learn the different ways you can benefit from these kinds of funds.

• Exit Academy: prepare thoroughly for a successful transfer or sale

GET IN TOUCH WITH OUR PROGRAMME MANAGER

WWW.VLERICK.COM/ENTREPRENEURSHIP

Sylien KesteleynProgramme ManagerT: + 32 9 210 97 02E: sylien.kesteleyn@vlerick.comVlerick Business School

Miguel MeulemanProfessor of EntrepreneurshipT: + 32 9 210 97 70E: miguel.meuleman@vlerick.comVlerick Business School

Mathieu LuypaertProfessor Corporate Finance and Mergers & AcquisitionsT: + 32 16 24 88 24E: mathieu.luypaert@vlerick.comVlerick Business School

Sophie ManigartProfessor Accounting & FinanceT: + 32 9 210 97 87E: sophie.manigart@vlerick.com Vlerick Business School