ASK THE EXPERTS

This is a critical question, especially if you are looking to remain with your company for at least the near-term. If you have any ongoing skin in the game (earnout, equity, etc.), the ongoing success of the Company can pay you dividends in the near and long term. As such, having faith in the fund with which you’re partnering to help execute the outlined growth initiatives is crucial, otherwise that equity holdback might not be worth forgoing more closing cash.

While private equity funds are doing their due diligence on you, you need to do yours on them.

• Make sure the partnership group, whether at the current fund or in their past experiences, have experience investing in your industry and can add transformative value.
• Ensure you have open lines of communication. Be honest. Ask the questions that are important to you and do not hold back. The more open and honest the dialogue, the better for all parties.
• It is important to remember that you know your company and your industry better than anyone. Make sure your opinion is heard. 
• Get under the curtain and get to know the firm as people, not as an institution. 
• Making sure they can execute and that they’re not just “kicking the tires.”
• Ask about their financing sources or relationships and their ability to close deals in a timely and efficient fashion.

Another consideration is ensuring that the firm’s investment strategy aligns with your goals. All parties must be reading from the same page of the same book to make it a great outcome for all. For example, if we are counting on a seller to have a hands-on role in the ongoing operations but the seller does not want that for themself, then there is a disconnect and should be discussed very early on to avoid disruptions later.   

A private equity deal is truly about relationships. That said, don’t partner with someone just because you like them. Get to know each other well. Partner with them because they have proven to you that they deserve the responsibility of controlling your company just like you need to prove to them that your company is worth being acquired. There needs to be a reciprocal approach in which both sides are aligned, and all needs are addressed.

At Roebling, we really do invest in people, not numbers or machines because we believe it is arguably the most critical aspect of all in a PE deal. We encourage you to get to know us.

While there are many different ways to value a business, buyout-focused private equity funds such as Roebling will typically prioritize the “leveraged buyout model” (LBO). This model is returns-driven, and effectively backs into a valuation accordingly. Put differently, in order for us to achieve a return of X% on this investment, we would need to value it at $Y. Not only does the LBO model inform return profiles and imply a valuation, but it also guides structuring, which is a critical part of analyzing a transaction. Two different LBO models could have the same valuation but completely different return profiles due to structuring assumptions. Achieving a balance between a healthy structure, a solid return profile, and a fair valuation, is what makes the LBO model most helpful.

We would take what the model tells us and combine it with research of where similar companies are trading, which helps confirm our model (or imply that it needs reworking). In other words, if our model dictates that we should be paying 2.0x for a healthcare company, we know that we have some corrections to make in how we structured the deal and the assumptions we used in the model, as 2.0x for a healthcare company is generally not a competitive or fair valuation.

Other popular models / valuation methods used in the M&A industry are discounted cash flow (DCF) models and the use of comparable transactions. In the buyout space, these options are less ideal for the following reasons:

1. DCFs are very helpful for deriving a direct valuation. However, they are simply not expansive enough for our purposes. While inferring the intrinsic value of a company based on discounting its future cash flows, the DCF does not indicate whether or not this valuation makes sense at a certain level of investment, nor does it involve structuring. We learn that a company is valued at $X, but how is that purchase price ultimately divided and paid out? What return does that imply if we invest $Y of our fund’s equity into the deal? How does this imply we should most optimally structure this deal? There are questions left unanswered with the DCF which is what makes the LBO more effective for our purposes.
2. Comparable transactions, on the other hand, can provide helpful general guidance but are less helpful for our purposes for the same reasons mentioned above. Additionally, no two companies and no two transactions, especially in the lower-middle-market, are the same. The intricacies of both company and transaction dynamics play a major role in how the deal is constructed, therefore, not accounting for those nuances would be misguided, thus making comparable transactions, on their own, a less useful valuation methodology for us.

In our market, there are two broad categories of private equity: “growth” and “buyout”. Under those umbrellas comes a plethora of different mandates but from a high-level, most funds will fall into one of those two classifications.

Generally, growth equity funds seek to inject capital into a company in exchange for a minority equity share. The companies in which they invest are typically younger, earlier-stage companies which need an infusion of capital to expand basic functions. Ownership is typically at the beginning of their journey in these instances and retirement, succession planning, or liquidity are not necessarily top-of-mind yet. Depending on when the investment is made in the life of the company, this world can sometimes overlap with and include venture capital. These funds can be an extremely valuable resource to growing companies and can be a difference maker in that company’s survival through both capital and guidance, although taking a more passive role than their buyout counterparts.

Buyout funds, on the other hand, seek to buy out majority shares in businesses and control the board and governance, allowing them to have stronger control over the trajectory and strategy of the company. The companies in which buyout funds invest are generally more established, later-stage businesses in which the owners are seeking a transition to realize their equity value, plan for succession, take some chips of the table, or retire. This is the side of the private equity market in which Roebling falls.

The primary value-add in the buyout world is expertise. While, in certain instances, the selling party can continue running the operations of the company, the ultimate decision-making capabilities are left to the board which the buyout fund establishes, which can include the sellers. Many of the companies we pursue have been run as lifestyle businesses; the owners have not had the energy, need, or sometimes the expertise to unlock the next phase of growth. That is where a buyout fund can help, while simultaneously allowing the seller to capitalize on their ownership (and sometimes their life’s work). This also takes the burden off the seller to wear all the hats within the organization.

We can build out teams and departments more thoroughly so the seller can take a few steps back and focus more on the areas of the business in which they are truly passionate.

Private equity is probably one of the most widely misunderstood disciplines in terms of investing. While many view it negatively, and think a company must ‘be in trouble’ to turn to private equity funding, there are actually a number of positive reasons companies seek this route, and it depends entirely on the type of private equity fund that did the investing.

Some funds do indeed invest in “turnaround” or “distressed” situations, where the company has been struggling and needs assistance. Others prefer an abundance of control and seek to standardize certain components of their portfolio companies. In Roebling’s case, we seek to invest in growing companies with strong foundations and strong leadership teams.

We partner with management to help unlock the next phase of growth through harmoniously implementing strategic initiatives and filling gaps that management previously didn’t have the time or resources to address. We truly seek to partner with a senior management team and be a resource, rather than get in the way and make wholesale cultural changes.