Yesterday Billboard Insider presented four reasons to consider adding an outside equity partner.  Today we talk about three traits to look for in a private equity partner: industry expertise; candor; and rapport.

Industry Expertise

Time is your most precious resource.  You don’t want to have to spend time educating a partner on how the out of home business works.  Billboard Insider remembers listening to two equity funds make a presentation to a group of out of home executives a year ago.  The funds wanted to make out of home investments.  It was obvious that neither fund understood the out of home business.  How could Billboard Insider tell?

• The funds talked about net income, not cashflow (EBIDTA).  Net income may be a good measure of profitability for most normal companies but in the fixed asset intensive out of home industry, a growing company will have healthy cashflow (EBIDTA) but net losses due to large depreciation charges. If an out of home fund talks net income it doesn’t know that it’s doing.
• The funds didn’t talk about their out of home deals.  They talked about deals in other industry sectors.  An out of home investor should be able to point to other transactions and other people in the industry they have done business with.

Candor

A good equity partner should be clear about what it wants from a deal from the start.  It’s a warning sign if your partner won’t be specific about what it wants.

• How much money does it want to invest and what is the minimum size investment it will make.
• How much of your company does the outside investor want?  Will they insist on having majority control or is a minority position ok.
• How long does the equity partner want to stay invested.  Many equity funds have a 3-5 year time horizon on their investments.  Some take a longer term approach.
• Is the investment on the same terms as your equity or does it have preferences as to when it gets paid.
• What due diligence needs to be conducted before the investment closes.

Rapport

You will be having lots of discussions with your partner.  Do you communicate well?  Do you trust each other.  Do you get along?  It also makes sense to talk to companies the partner has invested in to get an idea of what they are like to deal with.

If you have any questions about private equity, contact Dave Westburg, davewestburg@billboardinsider.com, 206-910-1283.

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