Private Equity

How a Private Equity Deal is Killed

Private Equity investors have a limited amount of time and resources.

If you’re working in the private equity industry, you have already seen, rooted for, and turned down countless deals. If you’re the owner or key employee of a company, you likely have only seen potential acquisitions come across your desk that would be accretive for the company’s gain, and not from an investment perspective. Thus, awareness of a few of the key deal-killing characteristics any one potential may be displaying is much lower than those seeing deal after deal and testing investment theory after theory.

Whether you are an investor or operator (or happily on the sidelines), the standard practice is to stick to a few core values and never capitulate. While it is smarter to be more conservative on what a deal killer would be, there is a heavy risk/reward factor that must be considered before you miss golden investment opportunities that aren’t an exact match. For these, it is perfectly OK to treat them on an individual basis, but the general principles should not be forgotten.

  1. Management Team: one of the very first pieces looked at in a deal. Who is leading it? Are they qualified at growing this company? Many leaders are capable of growing 0 to 1 or 1 to 100, but rarely both. The classic private equity mantra is to acquire a company, fire and hire new management, and financial engineer their way into a 5x ROIC, but why do things the hard way? Back someone who is not only a visionary, but also an executioner, and your investment will go much further than just a minimum hold period.
  1. Industry: does your investment team know and understand the industry you are contemplating an eight to nine figure acquisition in? What is the market currently growing at and are there competitors that are rapidly taking over market share? Understanding the industries that have the highest amount of opportunity not only on a macro-level but also within your team’s capabilities is a major key to be aware of. Of course, if there is an intense amount of growth to be realized in a new industry, you could always bring on a functional operator to assist in decision-making and deal diligence - but do not do it alone.
  1. Concentration: a core piece of data that is asked for during diligence, the customer concentration is to show that, even if they were to lose the top one, two, or three customers or suppliers, they would still survive and thrive. This is surprisingly one of the largest deal killers that come up, as a company grows with one core contract they land, and once they grow too large, they lose it and the company never recovers. Although mitigation of this can be done relatively quickly (1-2 years if one knows the industry well), the effort is better spent on growth rather than playing clean & catch up.

There are countless other characteristics that are bound to turn away investors, but it is up to you to find what your and your team’s strengths and weaknesses are, turn those into self-governed investment mandates, and be relentless with sticking to your guns, regardless of how much a deal is your ‘lady in the red dress’, as she always drives the man into insanity.

As industries, technologies, and macroeconomic trends evolve, so will these mandates (hopefully). Having a mix of backgrounds, ages, and specializations will always bode well in giving a wide net of theses and solutions, and team characterization should be prioritized just as much as your ‘deal killer’ mandates.

Vetted, Certified,
Speed in Hiring

Begin growing your portfolio companies within a few clicks

Questions Before Getting Involved? Reach Out Below

Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.