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What should a CEO consider when negotiating with private equity groups?

James Darnell
Profile Picture of James Darnell James, a partner at KLH Capital, is responsible for identifying, structuring and executing transactions; due diligence; financial analysis; and portfolio management. He is a member of the KLH Investment Committee and is responsible for all SBIC compliance. He serves on the board of directors for all KLH portfolio companies and is directly responsible for overseeing Federal Resource Supply Company.
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Q:

What are some areas that executives and entrepreneurs should pay particular attention to when negotiating partnerships and shareholder agreements with private equity groups?

A:

There are probably too many things to list that are really important for a business owner to understand about their agreements and documents with a private equity group. It is very important for the business owner to sit face-to-face with the private equity group and go through all the major terms of the deal. Questions to consider include:

What will compensation look like?
What happens if there is an add-on acquisition?
How are decisions made if there’s a disagreement?

Both business owner and the private equity group need to talk through these questions in a very open manner and get the issues out on the table. There are no dumb questions because most business owners have never been involved in a private equity deal. It’s okay to ask questions and to probe how these things work.

The second, most critical way for a CEO to protect themselves and to pay particular attention to is hiring only very experienced mergers and acquisitions (M&A) lawyers to help them with the transaction. Most business owners are going to have lawyers who have helped them with their businesses over the years. These lawyers have maybe helped with shareholder agreements, defended against a lawsuit, or something else along those lines. Those lawyers are great for general corporate matters, but having a very experienced M&A lawyer is extremely important. They will know what documents are required, the market terms and conditions of these agreements, and how to work with a private equity group to get a deal done.

With a good adviser by their side, the business owner sitting face-to-face with a private equity professional, talking through the deal, is the best way to approach such negotiations. This method is very effective in getting a deal done without being behind conference calls, red lines, emails or other similar obstacles.

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