Why we don't like excessive leverage

Most private equity firms rely on debt to finance transactions. Even the very successful, very well-run firms put leverage on the businesses that they own. I don't necessarily think that this practice, in and of itself, makes these firms "bad" in any way. It is a terrific capital management tool when it works out...

When it doesn't, it's a total, unadulterated nightmare. It is a nightmare for companies that don't rely on the loyalty and enthusiasm of their consumers. For those passion brands whose fortunes rise and fall on being able to supply their enthusiast consumers with a product or service that is not necessarily needed, but passionately wanted, the effect can be even worse.

These businesses thrive on R&D, customer service and the loyalty of their employee base. When the banks come calling and restrict the spending on these activities, these brands can shrivel and die very, very quickly. As such, New Value does not like to rely on recourse leverage to fund transactions. We think that returns can very easily be attained by growing these brands profitably with internal funding.

When choosing to sell your business, ask the question "How much of this transaction will be funded with debt?" It's important for you, your employees and your consumers to know.