Mergers & Acquisitions

• Anti-Sandbagging And Other Anti-Ambush Clauses In Merger Agreements

Investment Banking & Broker/Dealers

• Investment Bankers Size Up 2007 Prospects

Global Markets

• Rocky Yet Promising Road Ahead For China's Banks

Private Equity & Venture Capital

• Corporate Expectations For Venture Capital's Noncash Support Exceed The Results

• How To Avoid Major Private Equity Pitfalls

• Best Exit Is Still An IPO ... Except When It Is A Private Sale

Initial Public Offerings

• Institutional Investors Reap Greatest Returns From IPOs

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Avoiding pitfalls. Private equity is not just for high-profile companies such as Outback Steakhouse, Four Seasons Hotels, Neiman Marcus, Hertz, and Dunkin' Donuts (all of which have recently taken on significant private equity financing). Angel investors, venture capitalists, buyout firms, and other private equity investors are also seeing smaller companies as lucrative investment opportunities. The stakes are high for the entrepreneurs, whose success or failure can hinge on attracting the right private equity investor and handling the negotiations skillfully. Being unprepared for the process can lead to common blunders, but Alison Stein Wellner offers advice from those who have been through it. If an entrepreneur can identify and avoid eight major pitfalls of private equity, success is likely to follow.

Move slowly, and keep (or yield) control. The prospect of a multimillion-dollar avalanche of cash often leaves entrepreneurs with fantasies about how they will spend the venture capital. While daydreaming, they are overlooking the potential downside of the deal. Take time to reflect on any offer, the author suggests, and to seek advice from trusted advisors and fellow entrepreneurs. Not all investors have a company's best interests in mind, and some prey on a cashflow crisis or lack of confidence. Figure out (and remember) the goal. Entrepreneurs need to weigh the tradeoff between giving up control and gaining access to the capital, connections, and resources of the private equity investors. Private equity investors almost always acquire a degree of control, although some demand more than others. They often want to bring in their own managers. One business owner received an offer that would have required him to give over a large equity stake. Before saying yes, he realized that he was not willing to take the risks that might follow losing control and having an outsider running his business. Yet another business owner was willing to cede a large ownership stake so he could have more time to devote to managing the enterprise.

Get the books in order. Before seeking private equity, get the company prepared for due diligence. One entrepreneur discovered that providing a prospective private equity investor with the necessary information to conduct due diligence was consuming huge amounts of time. He ended up neglecting day-to-day management duties. As the business suffered, the potential investor lowered the price. After almost seven months of due diligence, the business owner called the deal off. Spend time finding the right advisors, suggests the author. Ask for references, and interview them carefully. Stay on top of things, and do not let the attorneys drive the process.

Do not hide weaknesses. Entrepreneurs should highlight the company's selling points but must be forthright about weaknesses and how they are being addressed. If evidence of a strong competitor, lawsuit, or other problem comes up during due diligence, the author warns, the private equity candidate will lose credibility with the potential investor if it was not disclosed earlier in the process. Investigate a would-be investor by speaking with the CEOs of other portfolio companies, as well as with those who have moved on. Listen to intuitive clues, and do not discount the importance of chemistry. Even when a deal looks great on paper, it will not thrive if the people involved are not comfortable with one another.

Abstracted from Inc. Magazine, published by Mansueto Ventures, 375 Lexington Avenue, New York, NY 10017. To subscribe, call (800) 234-0999; or visit www.inc.com.