How to sell to Private Equity investors

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It’s a potentially profitable exit strategy for owners of small or medium-sized companies. But, as Guy Davies of WestBridge Capital explains, private equity (PE) firms are shrewd buyers. Follow his five-point plan to make sure you get your approach right…

1. Understand how private equity works
Davies says: “Private equity investors are looking to make healthy returns. We aim to return three times the money to our investors and achieve an overall internal rate of return of 30 per cent. So a small business wanting to sell to a private equity firm or attract investment from it must have a good growth story – but it needs to be more than just a story. The owners and management team have to believe in the story and be confident that they can deliver on it. A private equity firm is going to be a partner – but for a limited time. We’ll typically exit an invested company after four to five years. At its best, a small company and its private equity investor are trusted partners achieving common goals.”

2. Build an ambitious management team
“To attract a private equity investor, you need a management team that has the ambition to take the business forward. That means recruiting the right team members in the years and months leading up to selling to a private equity firm. If we were going to support a management buyout – one of the ways we invest – we’d be looking for a company which had a management team that had been running the business, with the owner taking a back-seat for a period of time before the transaction. The sort of ambitious managers we like to support have typically worked in larger organisations and been recruited into a smaller company to take the business forward. They are entrepreneurial by nature and tend to have deep networks within their chosen market niche and they know what they’re good at. More importantly, they understand what they’re not good at and are keen to build a team around them in those areas where they need support.”

3. Focus on unique market strengths
“A private equity investor will want evidence that the business can grow. That means the company needs key strengths in its markets. For example, we look for businesses that have a ‘sticky customer base’. That might mean companies which have repeat or recurring business. For example, we supported one company that has a five-year contract to maintain point-of-sale machines in several major retailers. We are also looking for companies with a strong position in niche markets and which aren’t threatened by competitors. We also like to see strong customer development – a pipeline of new clients which can get stronger. When a company is generating a regular revenue stream, you can be more confident there will be funds to invest in further development.”

4. Show how the money will be spent
“We like to see a clear use for the funding. The due diligence associated with a private equity transaction means that there needs to be a detailed plan setting out clearly how the money will be spent, the impact of the investment, and how the business will develop. As with any plan, reality may well be different – but the business needs a plan to focus on. A company could consider hiring an experienced corporate finance adviser with a strong track record of raising funds. Such an adviser could help the owners and management make sure they have considered all potential issues before they approach a private equity investor.”

5. Prepare the company for change
“When a private equity firm invests in a smaller company, there will inevitably be change – so the management team must be ready to embrace it. We often invest in companies valued at between £6m and £10m, and businesses of that size could need to improve their sales and operational processes in order to enable expansion. The plan may initially involve adding more overhead into the business to lay strong growth foundations. Therefore, profits may initially go backwards. A small business may also have been run by an owner-manager in an informal way. We look to introduce the rigour and discipline of a larger company, including the use of comprehensive board packs and key performance indicators. The clear objective is to work in partnership with an open, enfranchised and ambitious management team to realise the full potential of the business.”

About author

Peter Bartram

Peter Bartram

Peter Bartram is probably the longest serving contributor to Director, having first written for the magazine in 1977. He is a prolific freelance journalist with more than 4,000 feature articles published in dozens of newspapers and magazines. He has written 21 books, including biography, current affairs and how-to titles, and has recently launched a crime mystery website.

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