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Private Equity = Disaster
Recently, I read a story about the bankruptcy of another Private Equity (PE) backed construction-related entity, Renovo Home Partners. This situation has, no doubt, left many associated with the bankrupt company “holding the bag.” All unpaid employees and vendors are reeling from lost wages, massive accounts receivable write-offs, and related issues.
Renovo was formed by Private Equity with the intent to acquire independent, privately owned home renovation businesses and package them into a large group of home renovation service providers branded Renovo Home Partners. Once this group was assembled, rebranded, and operating profitably, the initial PE firm would sell this larger, consolidated company to an even larger PE firm that would be putting together several similar companies to form an even larger, consolidated entity. This process is often referred to as a “roll up,” and these typically continue for 3 or 4 rounds, each “rolling up” into a larger and larger company. Then, the much larger consolidated entity will often go public as a way for the final PE firm to “cash out” of this investment.
There are several major issues with these arrangements; one of the biggest is that much of the money that is used to “buy out” the owners of these smaller firms is borrowed, essentially by each individual firm that is being acquired. After the buyout of the original owners, the debt that funds this buyout is placed “on the books” of the original business, which now must operate according to a new set of standardized rules and meet certain profit requirements (both set by the PE firm). At the same time, each small business is expected to (also) pay back the money that was borrowed (at a relatively high interest rate) to fund an often generous buyout of the previous owner.
The next major issue comes when PE firms try to “roll up” businesses that are not built on a common “system”. There is a fundamental disconnect with the PE model when each business is an individual organism that is successful because they are cultures that value relationships, intuition, and pride of craft. PE firms don’t value any of these qualities as contributors to business success. They believe that success will come once they consolidate duplicative overhead and install “systems” that the PE firm determines will work for all of the firms in the roll-up.
I have heard getting involved with PE described like this: if you don't care what happens to your employees, you don't care what happens to your customers, and you don't care about the legacy and reputation of the business you've built, but what you really only care about is getting a pile of money, then you should absolutely go for the PE transaction. They likened it to being as close as you can get to selling your soul to the devil. And one of the follow-up pieces of advice I have received was that, if I did decide I only cared about getting the pile of money, to get as much as I could up front and not to stay on with the PE firm to operate my previous business, or I would also be working hand-in-hand with the devil.
I have thought about all of this as I have been approached multiple times with buyout offers, and I have decided that I want to do it the old-fashioned way: take care of our people, take care of our customers, continue to build our own brand on our already solid reputation, and along the way, “earn” a good living. I won't be beholden to any higher power, evil or not.