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Not all investors are created equal: 3 ways to vet potential financial partners

For business owners who want to retain equity in their companies while partnering with another firm, identifying the right culture fit is key. It’s crucial to get to the heart of a firm’s identity and understand what you might expect after a deal closes.

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Selling a business can be an intimidating undertaking the first time you do it. You’ve poured plenty of blood, sweat, and tears into getting your company off the ground, so you don’t want to sell it to just anybody.

Historically, some business owners have viewed financial industry operators as predatory with a tendency toward “short-termism,” keen on extracting the most possible value from a situation with no regard for who might get hurt in the process. These founders are hesitant to sell or bring in financial partners because they’re afraid these partners won’t have the best interests of their companies in mind.

Despite this prevailing belief, there are plenty of great investors out there who can be a good fit for your needs. Finding the right partner starts with understanding what you want out of a transaction.

Understanding your priorities as a seller

The first thing business owners should consider is whether they care who ends up owning their prized creation. In a pure asset-disposition scenario, any rational business owner is incentivized to hold out for the best price. There’s nothing wrong with this approach, which is the norm for owners in certain verticals. For owners considering a deal where they will retain equity in the business or where the goodwill of the organization is an ongoing consideration, however, two criteria are the most important: culture fit and transaction structure/price.

The business sale/investment process is dynamic and emotional, which makes it vital that sellers understand the relative importance of each criterion. The alternative can be a tremendous time suck. To illustrate, our firm recently made an offer to the owner of a small business that looked good from a financial perspective. We judged the owner to be a values-based person, which we liked. We had already sourced a potential manager for the business who happened to be a friend of the seller, and we felt pretty confident that our offer — combined with the idea of installing his friend as manager and minority equity partner — would be a win-win for everyone.

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Unfortunately, we were wrong. The seller balked at our offer and refused even to counter. This seller was more concerned about the financial details of the transaction than the culture fit and goodwill of the business. As a result, both the seller and our firm wasted about 40 hours on phone calls, meetings, and negotiations.

We learned from the lesson and have since built processes into our early interactions with sellers to understand their motivations. As a seller, you can take a proactive approach by being transparent with buyers about what you need out of a transaction. If you value culture fit, let the buyer know. Ask questions about how the buyer does business and why the buyer is interested in your company. If you expect a financial buyer to pay full price, make that clear early in the process or ensure that your broker communicates that to potential buyers.

Business owners should care about who ends up owning their creation. (Photo by mavo via Shutterstock)

Retaining equity? Consider these 3 elements about these things

For business owners who want to retain equity in their companies while partnering with a firm on an ongoing basis, identifying the right culture fit is key. Here are a few ways to get to the heart of a firm’s identity and understand what you might expect after a deal closes:

1. Capital fit: Consider capital sources and the investors’ preferred exit timeline.

Many business owners forget to inquire about the exit expectations of possible financial partners. The response when you pop this question will either be in alignment with your own objectives or will seem quite foreign. Only consider working with firms or individuals whose views dovetail with your desires.

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2. Personality fit: Find out who will be your day-to-day contacts once the deal closes.

You have a great rapport with your contacts at a private equity firm, so you decide to work together. After the investment goes through, however, you discover you will be dealing with a junior analyst who has poor social skills instead of the individuals you felt comfortable around. This disconnect should never happen. Always ask to meet the men and women who will serve as your internal contacts after the transaction is complete.

3. Operational fit: Ask about operational ideas and strategies.

Professional investors who want a stake in your business will do their homework to understand the potential growth levers available in your company — not to mention how they plan to access them. You should feel comfortable asking investors to identify their general operational practices as well as how they intend to grow your business. Consider it a red flag if a buyer is unable or unwilling to share high-level ideas with you.

Your organization is as unique as your fingerprint. Make sure you find a financial partner who understands and values the innovations you have made and the potential you offer. Even if you have to say “no” to a few offers in the early going, rest assured that the odds of sourcing a great investment partner tilt strongly in your favor as long as you focus on the right considerations and remain patient.

(Featured image by Freedomz via Shutterstock)

DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation for writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.

Jim Moran is the founder and managing partner of ValueStreet Equity Partners, a San Diego-based firm investing exclusively in small businesses. His entrepreneurial endeavors began in 2006 and culminated with the founding of a small business that grew to more than $30 million a year in sales. After exiting his business in 2016, James founded ValueStreet to pursue the work he loves on a larger scale. He holds a B.A. from Skidmore College in Saratoga Springs, New York, and he lives in San Diego with his wife and son.

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