06 Apr Picking the right equity partner
We recently acquired a building and went to the market looking for an equity partner. We needed someone to put up more than $5.5 Million of equity. We talked to several partners and at the time I viewed them all as essentially the same, large companies with money to lend. We, fortunately, found an excellent partner but when making our decision I did not realize how different each partner could potentially be. I will be sure to ask myself and potential equity partners the following questions next time:
1. What will their involvement be?
a. What value do they bring to the table as investors?
b. Does this overlap or complement our own strengths?
2. How much work do we have to do to work with them?
a. Do they have complex reporting structures?
b. Are they publicly traded and must abide by greater SEC regulations?
3. Who will control the flow of money?
a. If we need to pay a contractor, where is this check coming from?
4. What type of banking relationships do they have? What type of debt will can they anticipate?
a. A partner that can bring cheap debt saves a lot of money.
b. Are they willing to guarantee a portion of the loan?
5. Does this deal have an expiration date for them?
a. Is this in a fund that needs to be closed in three years?
b. What if the market turns and it is best to extend the length of the project?
6. What will our organizational structure look like with them as a partner?
a. Do we need another equity partner to pick up a piece?
b. How many entities must be created to execute this project?
It is great to find a partner that offers cheap money, but many other factors are just as important. Fully vet every potential partner understand what the relationship will look like over the life of this project and beyond.
Posted by Matt Brown, Director of Acquisitions