I've been passionate about private equity for as long as I can remember, but it has a dark side too. Let's explore that a bit...
Communication
It begins and ends with a breakdown in communication, and the "fuel on the fire" comes from different personalities, styles, & compatibility.
It sounds cliché, but partnering in private equity isn't all that dissimilar from a romantic relationship.
It's all fun and games early on, but it comes down to compatibility long term.
The dinner/drinks/onsite stage is exciting — founders & PE firm talk about growth and upside.
But the reality can play out differently sometimes:
1st misunderstanding: the diligence period is no joke.
In fact, people who work at the "OpCo" (the company being acquired) often feel like they're working 2 jobs: (1) their normal job & (2) satisfying diligence requests for the PE firm.
The first stressor can be very basic -- the extra time at work puts strain on the family and other aspects of personal life.
"Is this what it will be like everyday?"
You can see where some initial doubt or stress can creep in early...
2nd misunderstanding: the financial diligence is extremely detailed.
Fairly common in middle market deals is to see the a gap in understanding between the finance person at the OpCo and the PE firm.
They know the "old way," but the new balance sheet is complicated.
Once you start talking LBOs, Revolving Lines of Credit, Equity Contributions and the like, it can be very overwhelming for someone working at the OpCo who might not be familiar with this new structure.
Frustration from PE side: the Management Team at the company isn't as strong as they'd hoped.
So now they're starting to think about hiring people once the deal closes.
This creates uncertainty around the whole deal, and contrary to popular opinion, private equity never wants to fire anybody, but sometimes it's just the reality of needing to view the acquisition for what it is -- an investment.
And the PE firm needs the best people it can find to help generate a return for its Limited Partners.
Difficulty agreeing on terms: this is why having a detailed LOI is so important.
There can be loooooong legal calls that go late into the night over disagreements on how to structure the deal.
So now, the deal closes, but everyone has "deal fatigue."
Diligence dragged on, maybe a few financial months weren't as strong, and everyone is tired (on both sides).
"And now we're supposed to be excited to move forward as partners?"
It can make the early days tough.
Moving Forward
This where long term compatibility kicks in (or doesn't). Teams can come together and make it happen, or it can get worse.
Here's a hypothetical example of it getting worse:
- teams start blaming each other
- people are hired and fired
- culture change at the company
- new business problems emerge
- new systems installed
- add-ons (buying more companies) with little integration
- and so on...
Big picture, it can get worse for the OpCo because the PE firm is ultimately in charge now and the "old culture" has changed.
Zooming Out:
PE is often made out to be the villain, but remember that both sides have to agree to the deal.
That's why in my opinion it always comes back to communication.
What Have I Seen?
If 0 is toxic and 10 is sunshine & rainbows — most deals I've seen are 6-7 — a successful outcome with a few bumps & bruises along the way.
The Problem I Solve...
Contrary to popular belief, many finance professionals struggle to correctly build a 3-Statement Model, and even fewer know what happens if their company is acquired.
I created a solution that teaches you both. Check it out here.
⭐⭐⭐⭐⭐ "Probably the best course on modeling I've taken."
Until next time.
—Chris