Courting Private Equity

More women are attracting private equity capital for their businesses. But what’s the price?

By Taylor Mallory

When April Anthony’s silent partner wanted out of her business, she went searching for a private equity investor for her $35 million company, Encompass Home Health, based in Dallas. “We crafted a deal with Apax Partners Worldwide in July 2004 where I own 20 percent, they own 70 percent and shareholders hold the remaining 10 percent,” Anthony says. “They’ve helped us grow to $125 million.”

Though Apax, a global private equity firm with $20 billion now under management, took the majority share, Anthony kept her CEO title and operational control of the company.

“In the beginning they were more involved,” she explains. “But now that we have an understanding of expectations, we have a status update periodically and have two Apax team members on our board at quarterly meetings.”

Private equity (PE) transactions allow entrepreneurs to access growth capital usually for about three to seven years without taking out loans or tying up their personal wealth. Such arrangements have accounted for one-quarter of the $2.3 trillion in worldwide deals so far this year, according to Thomson Financial – up 15 percent since 2002. But little is known about how many PE dollars are going into the 10.4 million majority women-owned U.S. businesses.

“The financial field is one of the last male bastions,” explains Gwendolyn Smith Iloani, president and CEO of Smith Whiley & Co., one of the few woman-owned PE firms. “But that is changing as more women are working in corporate America and getting the entrepreneurial bug.”

Though Anthony is working more now that she has the capital to grow quickly, she expects the hard work to pay off. “The reinvested equity will create an even greater return than the original investment,” she explains.

Getting a Piece of the PE Pie

Private equity deals are most attractive to serial entrepreneurs with exit strategies, as opposed to someone who left corporate America for more autonomy, or who wants to pass her company to her grandchildren, says Lisa McLemore, a partner at the accounting firm Fesnak and Associates LLP. “You’ll be selling your baby to the highest bidder,” she notes.

So how can women entrepreneurs attract a PE firm’s interest? Generally speaking, like any savvy investor, PE investors look for a profitable growth business with solid management and the potential for great returns, Iloani says. A few steps of careful preparation can further enhance a company’s appeal.

Diversify management. PE firms will almost never buy into a one woman show. Most investors prefer a team of strong managers who have financial incentives (i.e., stock options) and are also willing to stick around. “I consistently heard the phrase, ‘We back management teams,'” Anthony says. “They want to be sure the people who’ve been driving growth will stay in the car.”

So before a business owner approaches PE firms, she should fill in any strength gaps in her staff, McLemore advises. For example, many successful entrepreneurs have a core creative genius but little financial skill. That’s why Craig Danuloff, founder of Commerce 360, replaced himself as CEO with Lucinda Holt, co-founder of TurnTide, which she had sold to Symantec for $28 million after four years. “He’s great at selling but not as strong operationally,” Holt says of Danuloff. “I’m a serial entrepreneur who’s done this before.”

Get finances in order. Potential investors also want to see three to five years of financial statements, good audits, operation plans and best practices. All legally required paperwork needs to be in order. “Before going to market, shore up any operational or financial shortcomings,” says Michelle Arpin Begina, wealth management adviser for Merrill Lynch. “Make sure your personal expenses aren’t entangled in your business finances.”

Here’s where most entrepreneurs get help. Investment bankers, accountants and lawyers with PE experience can be valuable matchmakers. “People who operate in that space can lend you their network,” says Marilyn Sonnie, a partner at global law firm Jones Day who represented Harman International Industries in the recent acquisition attempt by Kohlberg Kravis Roberts, one of the world’slargest PE firms.

Have a clear plan. If records – and revenues – look good, investors will want to know what’s next. With her investment banker and accountant, a business owner should map out a business model, projections of future performance and an EBITDA number, Sonnie says. “Propose adjustments and cost savings that could be made,” she adds.

Amy Milman, president of Springboard Enterprises, a nonprofit that educates women entrepreneurs, says many women share what matters most to them – the process that got them there and how interesting their product is – but rarely discuss their financials or business qualifications. “Investors don’t care about your enthusiasm as much as how you’ll make them money,” she says.

Choosing the Right Money

Making a company attractive to PE capital is more than half the battle, but just because one or more investors shows interest doesn’t mean they are the right match for the owner. Whether or not a PE firm takes a majority share (which happens most often), it will take some control. The new partnership certainly has to be viable. “The typical entrepreneur has autonomy and can manage intuitively,” says Josh Lerner, Ph.D., professor at Harvard Business School and co-author of Venture Capital and Private Equity: A Casebook (John Wiley & Sons, 2005). “Now you have to be accountable to someone whose focus is solely on the company’s performance.”

Adele Cirone Oliva, partner at Quaker BioVentures, a $450 million firm, suggests talking to other companies in the PE firm’s portfolio to learn about their experiences. And Milman advises that an entrepreneur be certain her investors’ values align with her own before bringing them in as partners. “Women have complex, multifaceted lives, so we don’t see business as separate from our personal lives,” Milman says. “Many of us want to grow our businesses and families at the same time. This concerns investors who would rather the entrepreneur be totally focused on business.”

Anthony admits that she’s had to give up some of her autonomy, but she says her new arrangement has made her a better manager and revenue producer. “Sometimes in a business where you have only yourself to be accountable to, it’s easy to let the daily grind take you away from casting a longer-term vision of the future,” she says. “With third party investors you’re forced to stay ahead of their questions.”

This originally appeared in the November.December 2007 issue of PINK Magazine.