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Subjective analysis plays a significant role in Svoboda Capital Partners’ investment and acquisition strategy, says managing director Jeffrey S. Piper.

“If it were just a numbers game, I don’t think we’d be as successful as we have been,” Piper says. “You could invest in an A-plus industry, and yet have a C-minus grade on all the other subjective matters and components of a business. You're never going to be as successful as if you invest in a C-minus industry with an A-plus management team and an A-plus culture. The subjective components are what get a deal proposal over the goal line for us.”

Svoboda Capital Partners focuses on lower middle-market, growth-oriented companies in the business services, distribution and consumer products and services segments. Piper came to the firm in 2004 eager to help companies in these areas strategize and then execute their growth plans, something he didn’t get to do as an investment banker.

“It’s an opportunity to work hand-in-hand with management teams and entrepreneurs,” Piper says.

Smart Business Dealmakers spoke with Piper about his formula for identifying good investment opportunities and what entrepreneurs can do to capture the eye of investors.

Differentiation is key

As the availability of capital has grown exponentially in recent years, the number of participants in the private equity sector has also skyrocketed, Piper says.

“When I was on the sell side doing investment banking, a robust sell-side M&A process typically included reaching out to maybe 30, 40 or 50 potential buyers,” he says. “That process nowadays is being run to 200 to 300 potential parties, maybe even more. So the trick for all of us that are still playing in that very crowded pond is differentiation. We all have our own checklists and investment mandates, either from a financial criteria perspective, a structuring perspective or industries of focus. They all have to fit that particular funnel. But for us, differentiating ourselves is the key factor.”

Part of that differentiation effort is selling potential targets on the value of working with a private equity firm.

“There's a certain stigma attached to private equity and there's a lot of educating of entrepreneurs and organizations that private equity isn't the evil monster that a lot of people believe it to be,” Piper says. “So there’s an education process involved in dispelling that myth. By virtue of that, we get a good sense for what the cultural components are of the organization and we can establish a good rapport with management.”

Build collaboration

The strength of the management team is another critical piece when Svoboda is looking at companies.

“We don't have a stable of executives to do the plug-and-play model and drop people into place,” Piper says. “Because we're a smaller fund, we rely on management in large part to be in place. They've got a vision for growth and they're prepared to execute on it. They just lack the capital, the infrastructure or the sophistication to pull that off.”

Piper and his colleagues invest significant time sitting down with management teams to discuss strategic vision.

“If a management team's desire or willingness to seek out help isn't there, then we know that's a doomed and dysfunctional marriage from the get-go,” Piper says. “We spend a lot of time having those kind of strategic-level conversations to make sure that, subjectively, there's respect for all parties at the table. There is an understanding that no one is necessarily smarter than the other.”

This philosophy is what private equity is all about, Piper says.

“Otherwise, you just have private equity groups that are just sitting on gobs of cash, going out and doing deals, right?” he says. “The whole thought is we all become smarter investors by having different perspectives in the same room with us at the same time so that we can attack problems and come up with solutions collectively and collaboratively as opposed to just individually.”

Find alignment

Speaking to entrepreneurs who might be thinking about selling a majority share to private equity, Piper says commitment is an important element to move the process forward. The work that’s involved can sometimes be a surprise to owners who have been locked in on growing their respective companies.

“If you’re contemplating the sale of your business, you need to be committed to seeing it through,” he says. “Often times, particularly in the lower middle market, you’re looking at companies that have really focused all of their energies on growing revenue. They have forgotten about the internal needs of the business, whether that be HR, risk mitigation, benefits and compliance, or finance and accounting. I think entrepreneurs instinctively look at a lot of that overhead as a cost center, not necessarily groups that enable the rest of the business to function.”

If there is not alignment between the entrepreneur and the investor on the key principles of the deal, it could spell big trouble.

“You still have to have the right economic opportunity, the right incentive structure for people to behave accordingly,” Piper says. “So alignment for us is imperative.”

If everything comes together and the deal closes, Svoboda relies upon owner operators and management to continue to do their day-to-day jobs in the business.

"But we've got to provide them the economic opportunity and the incentive to continue to contribute to the organization to execute on those growth goals," he says. "And so for us, it's all about the economic alignment with the day-to-day executives.”