How to Vet a Private Equity Partner

Five questions to ask yourself before you set out on the journey of private equity investment.

Pick up any mainstream business publication these days and one theme is consistently true: The private equity industry is flush with cash.

With each passing month, private equity (PE) firms are announcing billions of dollars in new commitments to invest in businesses of all sizes, in all industries, all over the world. In short, there’s never been a better time to be a business owner seeking a financial partner.

But many business owners I talk to are wary of firms like ours. They fear a financially driven partner will come in and destroy the companies they spent a lifetime building—laying off longtime employees, changing the culture for the worse, and prioritizing profits for themselves. 

And they should be skeptical. Many well-known PE firms built their track records doing exactly that. But the public has gotten wise to the game, and firms whose portfolio companies neglect employees have and will become the targets of reputation-harming activist campaigns. 

But our firm, Brand Velocity Partners (BVP), believes there is a better way and was founded to change this narrative. We seek to be a true challenger brand in our space, upending conventional practices for the benefit of all involved. We back established consumer brands with yet-to-be-tapped growth potential, and believe that no great company has ever cut its way to prosperity. 

If you’re considering taking on a financial partner for your company, here are some questions you should ask yourself before engaging advisors and signing a term sheet.

1. What Are Your Plans?

Many business owners who take PE investment do so with the intention of transitioning out and monetizing their life’s work. Others are looking to supercharge growth and stay in charge. Both paths are perfectly fine to pursue, but your partner should understand your intentions from the start and be willing to go along with your wishes. The best firms know how to handle all transition scenarios and leverage their networks to create a succession plan and install the best managers.

Whether you stay on board or not, the partner you choose should be motivated to improve what you’ve built. Your company should not be reduced to being called an “asset”—industry parlance that we personally find offensive. Your company is technically an asset, yes, but it’s also a living, breathing organism, run by real people, and should be treated with great care. 

2. What About Your Employees?

When our firm invested in BBQGuys, a leading e-commerce platform for grills and outdoor living products, the founder made clear to us that any private equity partner had to take care of his employees. He had spoken with other firms before us and was wary of their motivations around “managing headcount.”

We flipped that concept on its head, implementing an industry-first “Share the Gains” program. BVP sets aside 10% of our carried interest—our share of profits from a deal—for the employees of our portfolio companies. There is no reason they should not benefit from our success, as their hard work drives positive outcomes. 

Beyond profit sharing, once your new partner is on board, it’s always good to conduct exercises of defining the company culture you want. Is your company one where people are excited to come to work every day? In this tight labor market, keeping employee turnover low is a tremendous competitive advantage. 

3. How Is Your Partner Funding the Deal?

PE firms invest either out of a formal pool of committed capital or on a deal-by-deal basis. Having committed capital gives the seller more certainty around funding a transaction, but there are many drawbacks. For one, formal funds have expiration dates. If the fund your company sits in is near the end of its term, your PE sponsor might be more motivated to extract short-term financial returns for the purposes of marketing its next fund instead of investing in the long-term health of your business. 

Expiration dates from committed capital can distract from long-term company benchmarks.

For BVP, this makes no sense. We want to build businesses on their own timeline, irrespective of what’s going on with the rest of our portfolio. We raise money on a deal-by-deal or “independent sponsor” basis, which allows us more flexibility and creative freedom when building an investor syndicate. In the case of BBQGuys, we recruited a group of NFL Hall of Famers—the Manning family, LaDainian Tomlinson, and Steve Hutchinson—who have been tremendous contributors to the company’s growth as brand ambassadors and advisors. 

We also believe that our model opens up access to PR to those who might have been shut out previously. Successful athletes and entertainers, for example, are anxious to break in. Some have even set up formal family offices and the placement agents still ignore them. As such, we think there’s some real opportunity here.

Regarding capital structure, what level of debt is your partner using? Debt can amplify returns, but also bankrupt a business if things go wrong. PE firms have overseen many failures over the years due to too much debt, leaving many communities and careers decimated in the process.

4. How Involved Will Your Partner Be?

When you take on PE partners, they usually take at least one board seat and schedule regular check-in calls with management. But the best firms will throw all their resources behind you, appointing their top executives to those board seats and leveraging every bit of their firm’s resources and network to grow the business.

For years, PE firms have touted their bench of “operating partners” to support portfolio companies, usually retired executives in their industry of focus.

But again, BVP is flipping this concept on its head. We don’t employ run-of-the-mill operating partners. We employ accelerators.

This elite group of 20 includes people from all walks of life—from athletes to accountants to executive coaches. These are not old hands looking for a cushy, post-retirement, part-time gig. Most are mid-career professionals still at the top of their game looking to push boundaries and help companies reach their full potential.

5. Do They Speak Your Language?

Last, your partner should be a match for you culturally. PE has its own culture and jargon that even the savviest of entrepreneurs can find cringeworthy. We take great pains to avoid that, and seek to meet entrepreneurs where they are and guide them to where they want to go. By mixing compassion and empathy with a high-growth, commercial mindset, we feel our model can produce much better outcomes for more people, all while providing an example that the rest of the industry can follow.

Drew Sheinman is a Founding Partner of Brand Velocity Partners. He has extensive experience developing and commercializing global celebrity, sports and lifestyle brands and businesses as an owner, entrepreneur and venture partner. Read more of Drew Sheinman’s Thought Leadership here.