At Wake Forest University, competitors in the annual Venture Capital Competition get two minutes to pitch their business idea, the classic “elevator speech.” The twist: they and the judges are literally in an elevator.

 

In reality, the private equity (PE) process is a methodical and sane business, without the crowded elevator or the high-pressure venture capital pitch sessions seen on television. Yet because the actual process is scarcely publicized, many companies seeking PE funds are confused about what to expect.

 

Demystify Your PE Expectations

The process begins with two simultaneous steps: identifying PE investors and refining your business plan. Often investment bankers or advisors are involved in helping your firm choose the right partner (see Part 3 in this series) and navigate the process.

 

Updating and refining the business plan is critical. Unlike a start-up company that uses a business plan to sell the Big Idea, you are convincing the potential investor that:

 

1. You have a great existing business.
2. There is substantial upside potential.
3. You have a strong, committed management team.

 

Settle in for the Long Run

There’s a long, deep relationship between a PE firm and the portfolio companies it invests in. So the process of getting PE funding is relatively drawn out. It takes time to ensure the right fit.

 

During your initial engagement with a PE firm, the investor will be setting expectations and talking about the potential for funding, as well as discussing your business plan. Next, you will drill down into how the firm would work with your company, along with the appropriate potential financing and management arrangements. During these meetings, both parties should be determining if a good working chemistry exists.

 

Plotting Your Company’s Course

Later in the process, the PE firm drafts a term sheet, calculating your company’s value. This is not an exact science, and business owners may focus on the calculated value of the company more than the other important aspects of the terms sheet, such as the funding structure and the operational relationship. Along with equity, debt financing may be used to leverage the deal.

 

The term sheet is negotiable, and both parties have to be comfortable with it; after all, it lays out not only financial arrangements, but also a working relationship that impact how you manage your firm. Ultimately, the relationships between business owner and PE firm can vary tremendously, so the nature and structure of how you will work together is as important as how much money the PE firm is willing to invest.

 

Signing on the Dotted Line

When terms are finalized, legal documents are drawn up and the deal is closed. In all, several months may elapse between first meeting and final closing, so business owners must look well into the future to think through business plans that will require a major injection of debt or equity. And because finding the right fit with a PE partner is so critical, you do not want to be pressed for time when negotiating for equity capital.

 

The day the documents are signed is merely the beginning of the ongoing business relationship, as it changes from negotiating the terms of equity to jointly attacking the marketplace. Most relationships start with regular contact in between board meetings, with one or more people at the PE firm mentoring the business owner and senior management team of your company.

 

Over time, the relationship may settle into a quieter pace, but the investor will remain actively interested in helping you and your company move to the next level of success.