When Private Equity Calls

Indeed, solution providers, who found themselves scorned by investors in the wake of the dot-com meltdown, now are thrilled at the unprecedented amount of cash being pumped into the channel by seasoned private equity investors. Solution providers point out that Madison Dearborn Partners' recent eye- popping $7.3 billion cash offer for CDW translates to roughly one dollar for each dollar of revenue for CDW, which recorded 2006 sales of about $6.8 billion. For VARs seeking some payback for years of hard work, it's a heady time. But hold on. Just how well prepared VARs are before they pick up the phone could determine whether they and the business go boom or bust in the years ahead.

Top solution providers say it's not wise to take just any private equity player's phone call or to enter into such conversations lightly. They say a private equity deal is better done by seeking input up front from trusted financial advisers and colleagues who have had experience with such transactions. What's more, they say, before even considering a deal, owners must do some soul-searching about their personal and company goals. That means answering difficult questions like whether they are emotionally ready to take on debt and give up some control to investors looking for a significant return.

The top U.S. solution providers, including some who have taken the plunge, say they wouldn't even dream of taking a cold call from a private equity investor. "I turn them away," says John Marks, CEO of JDM Infrastructure, a Chicago solution provider ranked No. 231 on the VARBusiness 500 list. "If you were looking at putting a new deck on the back of your house and someone telemarketed you while you were eating dinner with your family, telling you they do decks, is that the company you really want to build your deck? Or are you going to do your due diligence and ask neighbors, friends, business acquaintances about who is reputable and will do the job right? It's the same thing with a private equity transaction. If I am going to take private equity, I'm going to get a referral from someone I trust."

First And Foremost: What Are Your Goals?
Marks and other channel veterans say the first order of business is to look seriously at the goals for both you and your company. That means spelling them out on paper and in detail. It's no five-minute gut check. It's a serious examination of where you see yourself financially, personally and professionally one, three, five and 10 years out. It means looking at whether you have the stomach to enter into a financial marriage that requires taking on debt and sharing decision-making with someone looking for a significant rate of return. "You have to be totally honest from the get-go, because the deal could end up being bad for one side—typically yours—because these private equity guys know what they are doing," Marks says.

Next: The Temptation