The First Call with Private Equity: How a Business Owner Should Prepare

For a business owner who has never dealt with private equity, the first call with a PE firm can feel more significant than it usually is. In most cases, it is not a negotiation and it is certainly not a due diligence exercise. The first call is typically an exploratory conversation, generally lasting 30 minutes to an hour and usually conducted virtually. That does not mean it is unimportant. The first call often determines whether there will be a second one.

During the first call the PE firm is trying to decide whether your company fits its investment strategy and whether the owner is someone it wants to spend more time with. The owner should approach the conversation in much the same way. This is an opportunity to learn who is on the other side of the table and whether further discussions make sense.

Understand the Purpose of the Call

At this stage, the investor is primarily interested in the big picture. What does the company do? How does it make money? How large is it? What distinguishes it from competitors? How has it performed? Where could future growth come from?

There is also a question behind many of the questions: Why is the owner talking to us?

An owner may be considering retirement, looking to diversify personal wealth, seeking capital for expansion or simply responding to an unsolicited outreach. Some owners are ready to sell though many are not.

There is no need to manufacture a reason for the conversation. If you are simply exploring your options, say so.

Be Able to Explain the Business in Five Minutes

Before the call, develop a short, natural description of the company. It should not sound like a presentation that has been memorized. Explain what the company does, who its customers are, what sets the company apart in the marketplace and how the business has grown. Then provide enough financial information to give the investor a sense of scale.

Know Your Basic Numbers

As an owner, you don’t need to memorize your financial statements, but certain numbers should be readily available.

You should know approximately where revenue and EBITDA are today, how those numbers have changed over the last few years and whether the current year is ahead of or behind the prior year. If margins have changed materially, you should be able to explain why.

If reported EBITDA contains significant owner-related expenses or legitimate nonrecurring costs, those can be mentioned. There is no reason to debate every EBITDA adjustment during the first conversation. That will certainly come later. The important point is that the owner appears to understand the economics of the business.

Be Prepared to Explain Why You Are Interested in a Deal with a PE Firm

Expect some version of the question, “What are you looking to accomplish?” and it’s perfectly acceptable not to know whether you want to sell the company. Explaining your interest in understanding what a partnership might look like, or whether the right investor can help accomplish things that you are finding difficulty completing on your own keeps the conversation open without committing to a transaction.

The important thing is to think about the question before the call rather than developing an answer while the investor is waiting.

Have a Sensible and Compelling Growth Story

Private equity investors are interested in what the company can become, not simply what it has been. Be prepared to discuss where future growth might come from. That could involve new locations, geographic expansion, additional services, pricing opportunities or acquisitions.

Specific opportunities and details are more persuasive than opaque projections. Saying that a company can “double in five years” does not tell an investor very much. Explaining that the company has successfully opened three locations using a repeatable model and has identified five similar markets does.

At the same time, do not turn the first conversation into a sales pitch. Experienced investors can generally distinguish between opportunities management has genuinely considered and a growth story created for a transaction.

Don’t Try to Hide the Obvious

Every business has issues.

If one customer represents a significant percentage of revenue, expect the investor to ask about it. If revenue declined last year, know why. If the company remains heavily dependent upon the owner, be prepared to discuss the management team.

There is usually more credibility in acknowledging an issue and explaining it than trying to minimize something the investor will eventually discover anyway.

A sophisticated PE firm does not expect a perfect company however it does expect an owner who understands the company’s strengths and weaknesses.

The Conversation is a Two-Way Street – You Are Interviewing the PE Firm

Ask why the PE firm contacted you and what it finds attractive about your business. Find out whether it has experience in your industry and what a typical investment structure looks like.

If the firm talks about “partnering with management,” ask for an explanation of what that means including how involved does the firm typically become? What role does the founder usually have after closing? Does the firm expect owners to retain equity? How does it approach future acquisitions?

Don’t Negotiate Too Soon

Valuation sometimes comes up during the initial call. Be careful about establishing a price before you understand the potential transaction. Purchase price is only one part of the economics. Cash at closing, retained equity, earnouts, debt, employment arrangements and tax consequences can materially affect the value of a proposal.

There is nothing wrong with saying that you have not established a price and would first like to understand how the investor views the business and what a potential transaction might look like.

There will be plenty of time to negotiate if the discussions progress. The first PE call should ultimately be treated for what it is: a conversation between two parties deciding whether it makes sense to have another conversation. An owner who can explain the business clearly, knows the basic numbers, has thought about why a transaction might make sense and asks thoughtful questions is generally well prepared.

The objective is not to sell your company in 45 minutes. It is to leave both sides interested in talking again.