CEO Advisor Newsletter March 2018
Private equity investments are typically reserved for companies on the verge of a large growth boom, and strategic investors are specialized partners who can provide guidance and management help.
What is Private Equity?Private equity is capital sourced from extremely high-net-worth individuals or firms that raise and manage funds from pension funds, large trusts or extremely large organizations. They typically purchase shares in private companies, but they can also purchase equity in public companies with the intention of delisting the business from public stock exchanges. Private equity investments can be as small as $5 million and as high as a few hundred million dollars.
What are Strategic Investors?Financial investors like Private Equity firms are classified as "financial investors", who purchase shares in companies with the goal of generating a favorable return and diversifying their investment portfolio. Strategic investors become involved in the management and operations of the company in addition to providing capital. Strategic investors are meant to complement existing management, owners and partners. Based on their needs, strategic investors can invest at any stage of your business.
When Should I Seek Private Equity?Private equity investors generally only invest in proven businesses as A) Growth equity for low to mid-market companies, or B) Mid-market companies with substantial earnings. They can also purchase a company outright.
How Can I Find Private Equity and Strategic Investors?To find private equity investors, you need to hire an advisor with expertise in fundraising and growing businesses to the next level. Your lender, attorney, or accountant may also be helpful but a formal business/fundraising advisor is needed to both prepare you and connect you with the right private equity fund and advise you through the entire process.
Strategic investors can be found within your industry or a neighboring industry. In most cases, these investors will be dominant players in a sector where you already have professional relationships, but proper preparation and expertise is needed for both types of investors.
Here are four common investment scenarios that might help your company as its funding needs evolve: Buy out the CompanyPrivate equity funds can buy 80-100 percent of the outstanding shares of your business, cashing out founding shareholders and previous investors. The founder may be retained to continue to manage the business, or the buyout fund can install a whole new senior management team and Board of Directors. The great thing about private equity funds is that they have hard cash on hand to buy companies, thereby creating less uncertainty for business owners.
Cash out the FounderIt's also possible to partially cash out or to buy out just the owner/founder, while keeping existing investors in place. Sometimes, owners sell because of illness, divorce settlements, retirement, boredom or unsolvable squabbles with investors. Founder buyouts are also possible when key employees partner with a private equity fund to finance a "management buyout". Typically, private equity funds are more attracted to cashing out a founder if a controlling stake is available.
Buy Out Existing InvestorsOld investors can become "tired" investors, especially if they've had their money tied up for five or more years in a privately-held business. The terms of these transactions can be tricky but doable, especially if the underlying company still has considerable financial upside ahead.
Investment for Growth CapitalThe primary reason CEOs and business owners partner with private equity firms is for growth capital. Owners of prosperous businesses are often tapped out or want to greatly accelerate their growth. Every business and personal asset may have already been pledged as collateral on bank loans, jeopardizing the company's growth prospects and competitive standing.
Private equity funds can help prosperous business owners continue their winning ways with funding for acquisitions, building out the sales and marketing team, hiring key management team members, new product development and geographic expansion.
CEO Advisor, Inc. has the expertise and experience to help you through this challenging process of raising Private Equity capital. Contact Mark Hartsell, MBA, President of CEO Advisor, Inc. at (949) 629-2520, by email at MHartsell@CEOAdvisor.com or visit us at www.CEOAdvisor.com for more information.
The Value of a Board of Directors
CEOs want a Board that they can trust to support their decisions and help maintain their control over the business. However, as businesses grow, CEOs need more than just loyalty from Board Members. Recruiting a Board that fulfills its fiduciary duties, while diving in and playing a key role in driving the business forward is a critical step that requires special expertise.
We've identified seven capabilities and contributions that Board Members should bring to a business:
1. Strategic FocusWhile it may not be the task of Boards to actually produce the company's strategic plan, it certainly is the responsibility of the Board to approve and support it. Too many CEOs try to tackle far too much and need to be kept on focus within the strategic plan.
2. Recruiting TalentIf your Board Members are well-connected, especially within your industry, they will be familiar with top talent. They should introduce, advise and assist you in seeking out top talent. Nothing is as important to the success of a business as the quality of its managers and employees.
3. Key Business Relationships Board Members should be acquainted with Executives and key managers in your target markets. Introductions to potential clients, vendors, resellers, distributors and funding sources is an important factor that helps determine the success of many businesses.
4. FundraisingBoard Members should be integral to the fundraising process and should represent real dollar value (by increasing the value of the company in the many millions of dollars in some cases). This includes formal introductions to fundraising sources, attending meetings or conference calls for fundraising, and helping the CEO close rounds of funding by speaking with investors during the due diligence process.
5. Personal CompetenciesWhen selecting Board candidates, many CEOs look to executives from within their own industry. It is very important that you recruit and maintain Board Members from multiple disciplines, with expertise in your industry, as well as, fundraising, finance, operations, marketing, etc. to have a well-rounded Board.
6. Short and Long Term PlanningWhile it is the responsibility of the Board and top executives to prepare the company for the future, it is also the responsibility of the Board not to lose track of the present. Board members must be involved in achieving results today that will support both present and future goals and prepare for an optimal exit.
7. Succession PlanningVery few businesses have a succession plan, whether it is the selection and grooming of a follow-on executive or the identification and planning of an exit strategy. Unfortunately, most owners or CEOs choose Board Members based on expected loyalty or accept Members appointed by investors/stockholders. In doing so, they squander a chance to form and utilize a powerful business asset.
In summary, seek advice in recruiting a Board of Directors as a useful force for achieving the business' goals rather than being a hindrance to success. There are other pitfalls to avoid, so seek experienced, professional help to take your business to the next level.
CEO Advisor, Inc. can research, formulate and recruit a Board of Directors that can create tremendous value while adding depth to your senior management team.
Contact Mark Hartsell, President of CEO Advisor, Inc. for a no cost initial consultation at (949) 629-2520, by email at MHartsell@CEOAdvisor.com or visit us at www.CEOAdvisor.com for more information.