When it comes to private equity partnerships, I’ve seen too many business owners rush into deals without proper investigation, only to face disastrous consequences later. While my own PE partnership worked exceptionally well, I know countless others who weren’t so fortunate. The difference? I prioritized thorough due diligence on potential investors – something that surprisingly few entrepreneurs take seriously.
This oversight is perhaps the most common downfall in business transactions. Many founders get caught up in the excitement of a potential deal and skip the critical step of thoroughly vetting their potential partners. They focus on the numbers while ignoring the character and track record of the people they’re about to entrust with their life’s work.
My Approach to Investor Due Diligence
When I was considering PE partnerships, I requested approximately 15 references from each potential investor, covering various scenarios:
- Deals they completed successfully
- Deals they evaluated but didn’t pursue
- Situations where they were turned down by founders
- Partnerships where the founder eventually left
What impressed me was how quickly they provided these references – I had them the very next day. This responsiveness itself was a positive sign. I then personally contacted every single reference, including someone whose business had completely collapsed within the first year of the partnership.
This comprehensive approach gave me insights that numbers on a term sheet never could. I learned about how these investors behaved when things went well, and more importantly, how they responded when things went sideways.
The Fundamental Truth About Business Deals
I firmly believe that you cannot make a good deal with a bad person. This simple principle has guided my investment decisions and saved me from potentially catastrophic partnerships. Yet I’m constantly surprised by how many business owners ignore this fundamental truth.
Many entrepreneurs avoid selling their businesses not because the numbers don’t work, but because they haven’t spoken with others who have walked the path before them. They haven’t heard the war stories or success tales that could inform their decisions. Instead, they operate in isolation, making choices based on limited information.
The Unicorn Fallacy
One of the most dangerous mindsets I encounter is what I call the “unicorn fallacy” – the belief that your situation is unique and that you’ll somehow defy the odds that apply to everyone else. This thinking leads to poor decision-making and unrealistic expectations.
The reality is that there are market-clearing principles and valuations that apply across the board. Understanding these standards is crucial before entering any negotiation. As I often remind fellow entrepreneurs: you’re far more likely to be average than exceptional in these transactions.
This isn’t pessimism – it’s pragmatism. By acknowledging the patterns and principles that govern business deals, you position yourself to make informed decisions rather than emotional ones.
Learning From Others’ Experiences
The most valuable resource in any business transaction is the collective wisdom of those who have gone before you. Before making any major decision, I recommend:
- Speaking with multiple business owners who sold to similar investors
- Asking about both positive and negative experiences
- Investigating what happened 1-3 years after the deal closed
- Understanding how conflicts were resolved when they arose
This information is readily available if you’re willing to ask for it. Most entrepreneurs who have sold their businesses are happy to share their experiences – both good and bad – with someone facing similar decisions.
The path to a successful PE partnership isn’t mysterious or unpredictable. It’s well-trodden ground with clear signposts if you’re willing to look for them. The dangers become apparent when you talk to those who have faced them, and the opportunities become clearer when you understand the patterns of success.
In the end, the most dangerous aspect of any business deal isn’t the terms on paper – it’s the character of the people sitting across the table. No amount of legal protection can safeguard you from a partner with poor integrity or misaligned values. This is why I invested so heavily in due diligence on the people, not just the deal structure.
For those considering selling their business or entering a PE partnership, my advice is simple: do the work upfront to understand who you’re dealing with. The time you invest in this process will pay dividends for years to come – or save you from a partnership that could have destroyed everything you’ve built.
Frequently Asked Questions
Q: How many references should I request when vetting potential investors?
I recommend asking for at least 10-15 references across different scenarios. Request contacts from successful deals, deals they passed on, situations where they were rejected, and partnerships that ended with the founder’s departure. This variety gives you a complete picture of how they operate in different circumstances.
Q: What specific questions should I ask these references?
Ask about communication style, how they handled disagreements, whether they delivered on promises, what surprised the founder after the deal closed, and if they would partner with the investor again. The most revealing questions often focus on how the investor behaved when challenges arose.
Q: Is it normal for business deals to fail because of personal conflicts rather than business issues?
Unfortunately, yes. Many business partnerships collapse not because of market conditions or financial problems, but because of misaligned expectations, communication breakdowns, or character issues that weren’t apparent during negotiations. This is precisely why personal due diligence is as important as financial due diligence.
Q: How can I determine the true market value of my business before entering negotiations?
Speak with multiple business owners in your industry who have recently sold companies of similar size and structure. Industry associations, business brokers, and M&A advisors can provide benchmark data on typical multiples and terms. Understanding these “market clearing principles” gives you realistic expectations and stronger negotiating position.
Q: What are the warning signs that a potential investor might not be trustworthy?
Be cautious if they’re reluctant to provide references, especially from deals that didn’t go perfectly. Other red flags include pressuring you to make quick decisions, being vague about their funding sources, changing terms late in negotiations, or having a history of litigation with previous partners. Trust your instincts – if something feels wrong during due diligence, it will likely become a bigger problem after the deal closes.
