INSIGHTS from Prospect Partners

10 Key Questions to Ask Before Choosing

a Private Equity Partner
It’s time for the next stage of business ownership: Bringing on an investment partner. Finding the right fit is an
inexact science – some combination of due diligence, reference checks, and “gut feel.” These ten questions can
help sellers find the right match for their personality, business style, and future goals.

1. Does the private equity firm proactively

provide complete references?
A potential partner should offer access to the management
of all companies with whom it has worked over the years,
whether or not the transactions have gone well.

“Sellers should be able to choose which references to call,”

said Prospect Partners’ Principal Brett Holcomb. “Like a
marriage, the dynamics of the relationship can be hard to
gauge until you get deeper into it. For the best window into
what the investor is really like as a partner, hear a variety of
experiences. Talk to companies that experienced steady
growth, and those that hit some bumps along the way.”

Such information also can help set expectations about what

might unfold in the years ahead. What is the partner like
during good times? How did it handle a downturn? What
are its hot buttons?

2. Are references being checked early

enough? Prospect Partners. “I wanted our partner to have the same
business philosophy for growth and exit as I did as an
Start reference-checking immediately after investor groups owner, so there would be no surprises.”
have been narrowed to a manageable number of top
contenders.
3. Are the right questions being asked?
“A lot of owners make calls only late in the process, during
or even after the final Letter of Intent stage, and use those Write down all questions, and make sure none go unanswered.
references to reinforce a decision they already made, rather
than help them make a considered choice,” Holcomb said. “Most important to me was knowing the history of the firm and
“It’s better for everyone to initiate open-minded the types, frequency and number of transactions it had
conversations earlier on.” performed. Were they experienced and active in deal-making,
or were they learning as they go?” said Kurt Bland, President
The dialogue can give owners a better sense of ‘who I want to and CEO of Bland Landscaping Company, Inc., a portfolio
work with’, how each private equity firm supports company of Prospect Partners that provides commercial
management, and help the team prioritize the top criteria that landscaping design, installation and maintenance services.
matter. That ranking, in turn, can clarify other priorities – which “What relevant qualifications did the firm have to make my
may or may not be the ones the owner initially expected. business successful? Would they let us run the business but
participate meaningfully at the Board level?”
“Price was important, but finding the right fit was equally
important,” said Earl Rose, President of Owen Equipment Each seller will have a different set of “right” questions
Company, a provider of street sweepers, sewer cleaners, depending on his or her personal style and professional
and other infrastructure maintenance equipment of his goals. Regardless, everyone should also ask references:
thought process before he recapitalized his business with Would you ever do business with this firm again?
4. What is the firm’s track record with planning, management team recruitment, business
development or negotiations for add-on acquisitions, and/or
similarly-sized companies? with other areas of business-building? Is the firm committed
According to Erik Maurer, a Principal of Prospect Partners, this to helping management build a bigger and better company
answer is more important than the private equity firm’s prior over the long haul?
experience in the specific industry the company inhabits.
“Great partners offer more than just a checkbook,”
“Regardless of their industry, smaller companies share many Holcomb said. “The ability to help management think
overlapping needs as they grow into middle-market through the many challenges that come with growth and
businesses,” Maurer explained. “In recapitalizations, private provide expertise outside of the leadership team’s scope of
equity firms back strong management teams that are experience often contributes the most significant value
experts in their market segment. Management knows their over time.”
industry very well, but often needs strategic and financial
guidance to scale the business for growth. That’s why
learning what the firm has been able to do with other 6. What team will management work
like-sized companies can be telling.”
with, and is this team empowered to
Possible questions to ask include: Has the private equity firm make decisions?
done most of its deals in the seller’s revenue size range? Is it Different private equity firms use different models when
“dipping down” or “stretching up” to work with the staffing deal teams for their investments. It is important to
company? Was its prior fund (if there was one) working with understand in advance what model they are using and how
similarly-sized companies? it will work for the seller. Does the deal get passed from a
deal generation team to an execution team to operating
Said Bland: “We also we wanted to know the firm’s partners, or does the same team stay with the investment
investment management style after closing – would it make through its entire life cycle? How much authority does this
capital available for both organic and acquisition-type team have, and how quickly can they act when needed? The
growth? Not all partners do. We also talked to other ability to be thoughtful and decisive can significantly
management teams in the portfolio and asked them about increase the likelihood of getting the transaction past the
their growth path after closing.” finish line, and can be tremendously helpful through the life
of the investment.

5. What does the potential partner offer “We got a significant amount of comfort from the fact we
beyond capital? worked with the same people throughout and after the
process of getting our deal closed. We had built a lot of trust
In addition to financial resources, what other relevant and confidence in that team, trust that has only been
value-added tools are available to management? For reinforced over time as we’ve been able to make timely
example, can the private equity firm help with strategic decisions that have helped us grow the business by adding
people, systems, and locations,” said Joseph Lynch, CEO of
Minuteman Security Technologies, Inc., a provider of
enterprise security technology solutions, and a portfolio
company of Prospect Partners.

7. What are the firm’s communication

style and expectations after the deal
closes?
How do communications work between the private equity
firm and the portfolio company? Is the reporting process
formal or informal? Some firms hold weekly calls or
meetings that follow specific agendas. Others operate more
ad-hoc, with interim calls as-needed in between board
meetings. And speaking of board meetings – how frequently
do they occur, and where are they held?

“While there’s no ‘one-size-fits-all’ style, the communication

processes should feel like a comfortable cultural fit that is
aligned with how the business naturally operates, and
management should feel at ease with the team with whom it
will interact,” said Holcomb.

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 the years to come, said Holcomb, and should look forward
to developing a strong business relationship and an
enduring friendship.

Added Bland: “As an operator and president of a company

in a niche industry, I didn’t know a lot about private equity
going in. There are a lot of misconceptions about this space,
and I continually run into people who dubiously ask me how
I’m getting through the partnership. The honest answer is
I’m having a ball. The private equity support has allowed us
to grow faster, stronger and more aggressively. We couldn’t
have taken the risk to do so on our own. I’m thoroughly
enjoying post-close because we did the work and truly
picked the right partner for our company.”

About Prospect Partners

Prospect Partners is a leading private equity firm
investing in smaller lower-middle-market
8. Has the firm invested through economic companies. We focus exclusively on management-
led leveraged recapitalizations and acquisitions of
and business cycles? niche market leaders with revenues typically under
A private equity firm’s longevity is one signal of its ability to $75 million. Since 1998, Prospect Partners has
provide support during inevitable downturns. Another is the completed more than 150 transactions in the
kind of financial partner and advisor the firm has been to building of over 50 platform companies in widely
other management teams when the going gets tough. Find diverse niche manufacturing, distribution, and
out how many cyclical contractions it has experienced across specialty service markets. Prospect Partners
different portfolio companies and industries, and what manages $470 million in committed capital across
happened to those businesses during those times. Was the three private equity funds.
firm realistic about economic issues beyond management’s
control? Further: Is the potential partner able to provide the
robust capital structure the business needs to withstand the
Reach Out To Our Team
challenges that arise if the economy or industry takes a hit? If you know about an interesting company you
think will interest us, please call us today at
312.782.7400, visit www.prospect-partners.com, or
contact a team member:
9. What does the exit transaction look like?
Get a sense of Phase Two before the ink dries on the current
transaction, recommended Bill Zaruka, President of
Wedgewood Wedding & Banquet Center, the nation‘s largest
independent provider of weddings and special events, which
did just that before it partnered with Prospect Partners.

“My father and I want to stay actively involved running Brett Holcomb Lou Kenter Erik Maurer
Wedgewood for a long time,” Zaruka explained. “So we Principal Founding Principal Principal
asked what other owners experienced in their exit process.
We wanted to know how the financials worked out for them,
of course. But also how much influence they had in picking
the next partner. How closely they were tied to the business
in the next transaction. These questions all mattered to us.”

And then, a final gut check: Mike McInerney Brad O’Dell Rick Tuttle
Vice President Principal Founding Principal
10. Can you see yourself having fun
together?
The buyer and seller should genuinely like and respect
each other. They will be spending a lot of time together in

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312.782.7400 ph. • 312.782.7410 fx.
www.prospect-partners.com

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