If you have succeeded in forming a company without external financing, there is great likelihood that you will attract private equity investors. When the time has come to consider an investment partner, selecting who to choose will be a major decision. Here are five tips to ensure you pick the best investment partner:
1. Know your needs. It is important to determine exactly why you are raising capital. Is it for personal liquidity, growth equity, a management buyout, or a combination of all three? Before making the big decision to gather outside financing, understand what business opportunity confronts you. Only then can you determine the type of capital required and the right investor.
2. Evaluate each firm's track record. Choosing the right firm requires diligence. If you must, evaluate data on each firm, such as size, stability, capital resources, and track record. Be aware of the firm’s success history and level of experience with businesses related to your own. Assess the firm’s capacity to deliver returns for both investor and business owner.
3. Make sure the culture fits. Find a private equity firm you can work hand-in-hand with. Conducting interviews with CEOs of the firm’s portfolio companies can give you a feel of what working with a particular firm would be like. Narrow down your choices to firms who can provide capital and keep your management team in control of decisions.
4. The value of personal trust. Chemistry is a must when assessing a potential investment partner. Among the questions you can ask are: Does the firm operate with honesty and integrity? Do we share common ethics? Do we like them as people?
5. Look for stability. Stability helps raise follow-up capital as well as provides potential for growth. Monitor retention of personnel as well as investors. Determine if there is a succession plan crafted for smooth transition of the firm to the next owners.
