Selling a stake in your business to fund growth? Or perhaps your exit route is to sell outright to a Private Equity firm? Either way it pays to approach it in the right way.
Here’s six things you should understand before embarking on the process.
A good thing about PE funds is that their motives are usually transparent. They’re not that much bothered about the culture of your company except as a means to an end. Their main objective of course is to maximise their return, not to satisfy all stakeholders. You should discuss ahead of any transaction what their vision is especially if you are remaining at the company or even retaining a stake.
Beyond the financial returns, they will want to scrutinise the capability of your senior team, to see a strategic vision and growth roadmap in the business. They’ll also want to challenge the attractiveness of your industry.
Some funds focus on financial engineering. They’ll look for the opportunity to reduce costs and realise assets. But other PE funds will focus on nurturing businesses to achieve growth.
What matters to you? Maximising exit price or having a value-added partner for the journey? If it’s the latter, you’ll probably want to speak to businesses they’re presently invested in to understand what the experience is like for them.
PE funds like to build groups of companies. And it’s important to understand if your business will be a “platform” investment, which means a strategic first investment for them to which they plan to add by making further acquisitions.
If you’re big enough and interesting enough to be a platform, you’ll probably get a better price than as an add-on – but size matters and PE funds will buy smaller businesses only as add-ons to existing platforms.
Whilst PE firms buy companies, they are also investing in the management teams. If you pursue a PE investment, you might have to stay around until the next exit. That may be appealing if it allows you to realise a significant amount of capital now with the prospect of a second bite of the cherry when the final exit comes. And the right PE fund can help you with the growth. If you just want an immediate exit, you need a strong management team built around you.
Generally, trade buyers will offer you a less financially complex deal. They may use earnouts and deferred payments as part of their structure, but they won’t have the loan notes, preferred shares, management fees, redemption premium, liquidation preferences and other deal structuring tricks that Private Equity has in its toolbox.
None of these are bad per se but you need to understand the financial consequences, and first sight of a PE term sheet can be daunting. Indeed, management teams have often turned down good offers from PE firms which would have more than met their target returns because only when they got to the term sheet did they fully understand how it worked.
If you’re running a business, don’t underestimate how time consuming it can be to raise equity, and how much ‘mind space’ it will take. A good financial adviser can help you to present the business in the best light, negotiating and structuring a good deal, and take much of the load off your shoulders so you can focus on the day-to-day running of the business.
If you would like to explore this topic in more detail, get in touch for an informal confidential chat with one of our experienced and friendly team.