5 Questions To Ask Yourself Before Taking Private Equity

The lure of a big cash infusion from a private equity investor is tempting, but the money comes with strings attached. Before you sign the papers, ask yourselves these questions.

1. What are your own goals financially both for you and the company?

This means taking a long hard look at whether you want to give up a stake in the company or sell off the company completely in exchange for a partial or full cash buyout with payout terms dictated by performance. It means doing a personal financial and business plan on where you see the business and your own personal finances one, three and five years down the road. It means a plan for how much you want to make annually and the kind lifestyle you want to lead. It means developing a detailed business plan for each segment of the business charting sales growth, net income and EBITDA (earnings before interest, taxes,depreciation and amortization), cash flow and sales, general and administrative (SG&A) expenses as a percentage of sales for one, three, and five years out. Remember these plans need to be updated quarterly because of the fast paced nature of the business.

2. Do you have the financial stability and controls to pass muster with private equity?

If your company does not have proven financial controls and management then don't even bother considering private equity. You need to improve your financial health before even considering it. Many VARs just do not have the financial discipline to even get to first base here because they do not have the financial structure to pass muster with first class private equity players. Of course you can always get cash from private equity players further down the rung. But are these the people you really want to partner with?

3. Are you comfortable taking on debt?

Remember a private equity deal involves taking on debt. You have to have a comfort index for debt to do a private equity deal. That's how these deals work. If you don't have consistent upward cash flow over a five year minimum period then don't even look at it. The point is if you have good cash flow you can service the debt. Think of it as putting a large purchase on a credit card with a high interest rate. If you don't have cash flow to support paying off that credit card then you're in trouble.

4. Are you focused squarely on net income?

Many VARs are more focused on top line than bottom line. The most attractive targets for private equity are those that are squarely focused on net income. In effect, it means running your business like it is a publicly held company. It's all about consistent, growing returns. If you're net income track record is all over the map, then do not even consider private equity.

5. Do you need outside capital to grow your business?

The reason for taking on private equity is because you need capital to grow the business. If you don't have a business strategy that absolutely demands a sharp increase in capital to achieve your goals, then you shouldn't be looking at a private equity deal. What you've got to do is take a long, hard look at where you want to take the business. The big players that are taking the plunge here are doing it to acquire other VARs in order to dominate nationally and internationally in an intensely competitive market. They want the cash to offer clients national and international scope. Where you fit into this picture depends on your size and strategy. One VAR's vitamin is another VAR's poison.