How Your Ability to Grow After an Acquisition Is Influenced by Your Acquirer's Round of Funding
Paul explains how an acquirer's private equity round affects your ability to grow after the deal and build the value of your rolled equity, and how to find the partner that fits your growth needs.
Full transcript
Generated from the episode audio and lightly edited for readability.
Good afternoon and welcome to another episode of the Martin Rehab M&A advisory. Today we are going to continue on our discussions of what impact private equity has on many crucial aspects of the biggest deal of your life. And what we're going to talk about today is what does the round or stage of private equity have and what impact does that have on your ability to grow after the deal and get the second bite of the apple? Let's jump in. So we have seen over and over and over again with companies that have gone into the market, sold their businesses, partnered with a larger company, growth is critical to the endgame.
And the reason for that is that many of these deals are partnerships. So for example, the acquirer will come in and purchase 70% of your company. You will roll forward 30% of your company or 30% of an equity position. And so once that's structured, how do you win? How does that become success? It becomes success when you grow the value of that 30% equity value. That's where you see success. And what we very commonly see and what we would tell you is that you should anticipate if you match with the right partner that what you came in with in terms of cash for 70% of your company, you should come out with at least that same amount on the second bite of that apple and that 30% equity position, which means that equity has doubled.
Over the three to five years that you are continuing to be partnered with that larger partner. That is success. But the only way to find that success is to find a company that matches what you need to grow your company. So how does the private equity round or stage impact your ability to continue growing after the deal? And again, many companies out there are backed by their first private equity group. Some are backed by a newer private equity group, round two. Some are even in round three.
And what I would tell you is that whether it's round one, round two, both want growth. But what we commonly see is that neither of these round one or round two backed companies are applying constant pressure to grow. You don't and you should not need pressure. The best deals are happening when you have alignment with the acquirer which gives you a huge opportunity for growth. So there shouldn't be pressure. The the pressure is that you're aligned with the acquirer. As you grow, their equity grows as well.
And so this it's commonly said and we commonly hear that we're a little worried that we're going to have a lot of pressure to grow. Well, that's going to be internal if you have it because you're going to be aligned and you're going to you need to be best matched with the company that you can grow best with. And what is most important is that the acquirer will support and help you to achieve that growth. And so what is their process for growth? What approvals do you need to achieve to do a small acquisition after the deal or to do a new startup?
What is their due diligence process? What is the legal support that they provide to you acquiring businesses after the deal is done? And what is their startup track record? How many new clinics, you know, they call them denovos have they done from companies that they have acquired? Really, really important to take a look at that. And I think both round one and round two companies can have positive influences on your ability to grow. So what would be some of the unique differences of a company that is in a round one of their private equity or stage versus a round two or stage two private equity?
Well, look, a round one private equity-backed company is going to have a little less capital to grow. So the deals that you may be able to do may be a little smaller than if you're in a round two. Now you may not have with a round one backed company. You may not have a full acquisition or a startup support team in that company. It may be more relying on you to go out and find those comp find acquisitions, find those startups and go through some many of the steps of that process.
And what we commonly hear is that companies, business owners will call us and say, you know, we talked to one of these companies that are in their round one and they're saying it's going to be a huge advantage for us to get in on the ground floor. And while yes, we see and understand the opportunities of what that means when you get in on the ground floor. You're getting in when they're just getting started, but they may not have as an efficient and they may have a less polished startup and acquisition process.
Now, what will round two bring to this opportunity for growth? Well, they're going to have significant capital for growth. More than likely, they will have a very robust startup and acquisition team and folks on that team that will support your growth. And certainly, they're going to need to define the opportunity. And we're going to need to define the opportunity as opposed to simply getting in on the ground floor. It's looking at the opportunity based on how you get in and when you get out of your equity.
Okay. So again, it needs to be very well defined, especially in a round two company on again how you get in and how you get out of the equity that you would have in that company. And again, while that may be a little bit more complicated in a round two company, again, they're probably going to have a more polished due diligence and legal team. So in summary, the impact on your ability to grow, it's the match. And many will be matched well with a round one company.
Many will be matched possibly better with a round two company. So it could be either or. Okay. Now, what is the most important impact on your ability to grow? And many times I don't think and we don't see that the best deals are being done simply with the round two companies or simply with getting in on the ground floor of a round company around one company. How do you choose the best partner for you whether it's a round one or a round two? And I think it's first and foremost looking at what are your greatest needs as it relates to growth.
What do you need as it relates to growth? And what support areas of support best align and fill in what we would call the blind spots in your process? Those are maybe some of the weaknesses in your current ability to grow and what company out there best supports and aligns and fills in those blind spots. Third is what are the areas of strength that you currently have as a growth company. You know, obviously if you're looking to join a company and you're looking to grow after you join that company, you have done some things very well.
Can those areas of strength that you have, are they going to be best supported or are maybe they going to be thwarted somewhat based on the match that you were looking for out there? And again, in order to get the answers to those questions, you really have to ask the hard questions about the process that an acquirer uses in order to support and fill in your blind spots and drive your grow your areas of strength. And the way you do that is to hear stories about how they have worked with other companies.
And from that, you're going to be able to picture, literally picture in your mind, your team's ability to be supported by their process or not. So, if you are a company and you're looking to go into the market and potentially you're looking to have a partner out there, give me a call. Click below. Let's talk because I'd love to have a conversation about how we would determine who would the best company out there be to help support your growth. I look forward to talking to you in the very near future. Thank you.
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