RAF

Choosing the right private equity partner is a strategic and consequential decision for any founder. The real question isn’t just who will invest, but how they’ll support you and your business over time. This guide explores how to evaluate potential partners and determine the best fit for your business, your leadership team, and growth plan for business.

How Do Private Equity Firms Operate?

What Should Founders Look For When Evaluating A Private Equity Partner?

Selling a business is far more than a financial transaction. It is a profoundly emotional and transformational moment in a founder’s entrepreneurial journey. For most founders, the ownership transition of the business they have spent their lives building is one of the most significant decisions they will ever make, impacting not only their own life and legacy but also that of the employees and the community with whom they are interconnected. 

Therefore, founders must look beyond the tangible business aspects of any deal and into the vision and values of their private equity counterpart to ensure cultural and intrinsic motivations align. 

Here are some of the most important elements to evaluate in a partner:

Partnership Style: Empowering or Interventionist

Founders should not short-change the process of building a thorough understanding of their soon-to-be business partners, particularly if they expect to retain equity post-transaction and remain as the lead operator in the business. Communication style and trust in the new partnership should be paramount considerations before finalizing any transaction. 

Proposed Capital Structure

It is often the case that at the onset of a new partnership, everyone is optimistic about the prospects of future growth. However, business is rarely as predictable as everyone hopes. Different capital structures have varying levels of flexibility in the face of uncertainty. In particular, the amount of debt and terms associated with that debt can create the risk of dissolution when things do not go as planned. It’s important to understand that for most equity firms, they are only liable for the equity contributed to the balance sheet, while the debt is non-recourse in nature. In other words, if the business faces challenging times and the burden of debt outweighs the equity loss, a private equity fund would rather cut their losses than invest further with their partners to overcome the challenges.

Industry and Business Archetype Experience

Familiarity with a target company’s eco-system can increase the speed of due diligence and potentially add value to future growth by utilizing favorable industry networks. Firms with past and current exposure to business models that share challenges and opportunities can create network learnings to accelerate growth. 

Founders looking to benefit from these network and advisory benefits should go beyond simply noting examples of past relevant investments, but also diligence how the private equity firm actively connects portfolio companies together to maximize the benefits. Do the portfolio companies regularly engage with each other? Is there some kind of annual partners or leadership summit?

Ownership Horizon

Every private equity firm understands the appeal to founders of being patient growth partners with long-term perspectives and a commitment to building great companies, vs. simply focusing on short-term financial returns. Unfortunately, most are also saddled with structural elements that impede their abilities to act in alignment with their outward messaging.

The foundational truth is that as they enter a transaction, most firms have already planned their exit, and it’s on a finite timeline. Typically, timelines are driven by the underlying fund dynamics of the firm, in which funds are raised for institutional capital providers with an expected timeline of being returned. This, in turn, creates artificial pressures that dictate an array of decisions from willingness to invest capital as time transpires, shorter triggers on human capital decisions, and hasty growth expansion decisions that could breed negative consequences, to name just a few. 

It’s important for founders to understand the average hold period of their potential private equity partner, the fund vintage of the PE group they will be a part of, and where they fall into the life of that specific fund. All these elements will provide very helpful clues to separate fact from fiction regarding the expected duration of their investment, and ultimately, whether a firm can structurally back up its messaging around being a good partner.    

How Does RAF Assess Whether A Business Is The Right Fit For Its Portfolio?

We target lower middle-market companies with between $4MM and $20MM in EBITDA that have exhibited healthy revenue growth over the years, have operating margins in excess of 10%, and possess a defensible advantage that we believe is sustainable over time. Sustainable advantage may be rooted in intellectual property, but is more often tied to strong brand equity, differentiated value propositions, unique go-to-market approaches, or serving a niche market with significant moats against new entrants.  

Durable competitive advantage is of the highest importance to us due to our indefinite hold period. Relative advantage is much less important to someone only expecting to partner with a company for a few years before jumping ship, but when your mission is to grow lasting and powerful companies over a long horizon, competitive advantage becomes much more important.

What Is Distinctive About The RAF Approach?

RAF is a unique buyer in the private equity universe. We marry traditional private equity attributes, such as access to capital, professional M&A expertise, and competency in legal, accounting, and operating experience, with a structural foundation that promotes a long-term business approach without the pressure to recycle businesses every 3-5 years. Because our capital is not tied to a “fund” with an artificial lifespan, but rather is evergreen and fully recyclable, we have a structure that never drives the artificial decision-making cycles seen in many other firms, allowing us to fulfill our mission of working with founder and family partners to build great businesses for the long term.

This vision begins with the management teams of the businesses we seek to partner with. In the words of RAF’s Founder, Robert A. Fox, “Our bottom line is people – people of the highest caliber. From our corporate staff to the former company owners, we build honest relationships with a shared commitment to success. At RAF, the most valuable deal is not a one-way commitment of capital. It is a mutual investment of confidence, respect, and the desire for success over many years to come.”

Ultimately, we invest in the people who are responsible for leading the business, more than in the entity itself. Therefore, alignment on shared values, uncompromising integrity, and a competitive and ambitious vision for the business are paramount to our assessment of a partner. We hold ourselves to the same standards and believe every founder who is evaluating a potential partner should take an equally exacting view of the values underpinning the firms they consider.  

What to Ask When Evaluating a Private Equity Firm

Beyond Capital, What Kind Of Support Should A Company Expect From A Private Equity Firm?

While many founders begin their evaluation of a transaction with purchase price, there is more to consider regarding the resources their new partner will bring to bear over the tenure of their newfound partnership. One should consider how their partner will help to facilitate future growth plans beyond serving on their board of advisors. While advice from well-experienced advisors cannot be undervalued, founders should also consider tangible resources at their disposal that contribute to business growth. 

Ongoing Capital Access: Capital support should extend beyond the initial transaction. Founders should consider a private equity group’s willingness and ability to provide working capital and make future capital expenditures that promote business growth. RAF’s unique capital structure features a central credit facility that enables each of our portfolio companies’ unconditional access to funds that promote investments in R&D, facility upgrades, and market expansion initiatives. 

Through cross-collateralization and diversification across industries, we borrow at better than market rates and offer incredibly advantageous terms, such as not requiring amortization payments on outstanding debt. Access to capital throughout the lifecycle of a business enables both aggressive growth plans and sustains resilience under the pressure of difficult market conditions. 

Shared Resources: Additionally, we have made human capital investments in the fields of risk management, freight and warehousing logistics, international product sourcing, tax accounting, and digital marketing experts and technology to provide a suite of shared resources amongst our portfolio companies. In many of these business functions, we can group the buying power of our portfolio companies to deliver significant cost leverage, while our subject matter experts on staff provide targeted counsel to our management teams. Our mission to build great companies over indefinite timeframes is supported by these tactical efforts to offload as many cumbersome, non-core tasks and functions from leadership teams as we can.

How Can A Founder Ensure Their Vision Is Preserved Post-Investment?

While energy is often applied in crafting certain provisions and guardrails as a part of a transaction, there is simply no substitute for trust between partners. Throughout the course of due diligence, it is important for founders to remember that while their private equity suitor is exhaustively vetting their business, they too should be evaluating the private equity group. In the words of Ronald Reagan, “trust, but verify” is apropos to the process a founder should be undergoing before consummating a transaction. 

They should speak directly with current and past partners of the private equity firm, ask focused questions about challenging experiences and how each party defines success, spend time away from the boardroom to understand their guiding set of principles and beliefs, and determine whether they align on values and vision that will ultimately underpin their partnership. Trust is what transforms simple coordination into true collaboration over the many unpredictable years to come.  

Choosing the right partner starts with understanding why private equity is the right fit—not just for a transaction, but for the long-term future of your business. At RAF, our investment criteria reflect a commitment to supporting your company from capital support to hands-on business development. We offer a partnership built to last.

To learn more about how RAF can support your business, please reach out to a member of our acquisition team.