Questions for the audit committee to consider
- Does the company have a strategy for financing its future?
- Is the company transaction-ready or able to capitalize on financing or corporate transactions opportunities?
- Could the company survive with the additional debt required to fund the transaction?
- When evaluating the PE partner, what are the investor’s investment objectives and operating style? What types of transactions has the investor executed in the past?
- Once the transaction has been completed, what changes can be expected and when? What is the likely form and timing of the investor’s exit strategy?
- Is this a passive, financial partner or a more active, operationally-focused investor?
- Who from the PE firm will play an active role in this partnership? Do they have adequate bandwidth or is it possible they will delegate responsibilities to a more junior person?
- How much focus will the PE partner place on accounting, controls and other risk management issues?
The best time to get to know a PE partner is before the investment. In fact, the best time to prepare for this or any such financing event is well before the need or opportunity arises.
PE investment is again on the rise and there is a good chance that board members may soon be discussing potential PE investments. What follows is an overview of the board’s role (specifically those on the board charged with the oversight of financial reporting) in evaluating and executing a partnership with a PE investor.
PE investor teams often need strong board members with valued experience in finance, accounting, auditing and risk. PE executives may be long in strategy and operations, but often lack expertise in areas such as accounting, tax, risk and controls.
Maximizing readiness prior to a transaction
In today’s fast-paced business environment, the need or opportunity for a major financial transaction — such as the infusion of PE capital — can arise at any time. Board members should be thinking in terms of transaction and exit readiness, especially as it relates to the financial, tax, accounting and other related areas of the company.
The readiness mindset should permeate the company’s culture and focus. The board should be asking these questions and considering these issues on a continual basis in order to be prepared for any future transactions.
The board’s role in the PE investment process
Prior to taking on an investment partner, the board of directors has a responsibility to its shareholders to conduct an appropriate degree of due diligence. Getting to know the incoming investment group, its individuals, operating style, objectives and planning horizon are all essential to this process.
The board should review the track record of any such investor. Considerations include the fund’s history with regard to long-term strategic growth versus operational improvement and cost-cutting. It is important for the board to form its own opinion about the investor by examining its past decisions, actions and exit strategies.
It will also be important for the board to assess the investor’s operating style. Operating approaches can range from passive financial participation to active engagement with operating decisions and strategies. It is important that company management, the board of directors and investor find the right fit.
Finally, personality, management style, experience and leadership ability matter. So it will be important for the board to determine who from the PE shop will be taking on which specific roles — specifically key operational, managerial or board positions where experience matters most.
What comes next?
Once the transaction is consummated, many if not most PE investors reconstitute the board. Unless the investor is taking a minority position, the board of directors, including the audit committee, will most likely be replaced. If the opportunity presents itself to remain on the board following a PE investment, board members will need to ask themselves, “Do I want to stay on and are my skills suited to the new investor?”
With the heightened risk that comes from numerous changes to operating strategies, staffing and processes, there’s a case to be made that having board members familiar with the company’s prior operating model and risks is beneficial. Either way, the change felt by a PE investment will be significant.
