Whilst trade buyers will typically acquire 100% of a business, private equity will look to partner alongside the existing owners and management team to help drive the future growth of the business.

Some shareholders consider the option of selling a part of their business as an attractive way to create liquidity, particularly where the majority of their net worth is tied up in the value of their company.

Private equity (PE) offers business owners the opportunity to realise a significant amount of the value which they have created while having the potential to maintain a meaningful equity stake and continue to contribute to the business strategy going forward.

The majority of PE investors will look to have an equity stake in the 25% - 75% range. Many private equity investors will look for the existing owners, and the wider management team, to retain a meaningful equity stake in the business to ensure all interests are aligned. This also helps provide the new investors with the comfort that the existing owners and management remain confident in the business’s future prospects.

Partnering with a PE investor can also provide an effective step in a business owner’s overall exit strategy and succession planning. Introducing an investment partner can help accelerate the growth of the business through access to further capital that may not currently be available to the business, together with strategic input from experienced investors. A private equity transaction can also provide the wider management team with the incentive of having an equity stake in the business going forward. 

What types of businesses are of interest to private equity?

Different opportunities appeal to different types of private equity firms. Some PE investors will focus on specific industry sectors and size of investment whilst others are attracted to certain types of opportunities such as growth funding, succession planning, and sector consolidation.

In looking at investment opportunities PE will typically consider the following:

• A strong business track record
• Proven management team
• Favourable market position
• Strong growth potential
• Consolidation opportunities
• Opportunities to increase efficiencies

Preparing your business for investment

Key areas for business owners to consider ahead of a sales process:

• Have a strong understanding of your financials
• Have in place a strong management team with the ambition to drive the business forward
• Have a robust business plan which clearly demonstrates the strategic direction of the business and the opportunities available to grow revenues and profitability
• Get the business ready for a due diligence process
• Detail what makes the business attractive to potential investors
• Have a valuation in mind and how much of your business you are willing to sell
• Identify potential investors
• Identify potential exit strategies for investors

Is private equity the right fit for you?

The right PE partner will bring lots of experience in growing companies and strategic insight which can be used to support your business in realising its growth potential.

In considering PE investment, it is important to make sure the interests of all parties are aligned. Key areas for business owners to consider are as follows:

• Investment horizon – what is the exit timeline of the private equity investor and is it aligned to your own. Many private equity investors will look to exit within a 3 – 7 year period.
• Ultimate Exit strategy — The business owner needs to clearly plan out their complete exit from the business with the private equity investor. This could be structured into the original investment via an earn out over a period of time or predicated on a future private equity transaction or a sale of the business to a trade buyer.
• Control — Business owners need to consider how involved potential private equity investors want to be in the day-to-day operations and strategic direction of the business. Private equity firms will typically take an active but non-executive role, contributing through their knowledge and expertise in supporting the business.
• Business Owner involvement - Private equity investors will typically expect business owners to continue to be involved in the business following the investment. The extent of this will usually be determined by the how involved the owner is in the day-to-day operations.
• Business Change – Private equity investors may look to introduce additional governance to a business such as appointing a Chairman, implementing detailed KPI reporting and producing detailed monthly board packs.

Summary

A sale of a stake in your business to private equity provides owners with the opportunity to realise some value now, whilst bringing on board an investor which can help drive business growth and significantly enhance the future value of the business.

Next in this series of blogs, we will be focusing on using private equity to grow your business.

Find out more

If you would like to discuss this further, please don't hesitate to get in touch with me, or a member of the Corporate Finance team.