Private Equity for Businesses

Private equity for businesses

Private Equity (PE) can be a fantastic experience that drives ambitious businesses to transform and grow fast. The potential rewards for management and investors alike are huge. The outcome is often a very successful, and valuable business. The question is whether PE is the right move for you and your business? Well, the answer is simple, if you have a successful business with a proven business model and are ready to make the next big strategic move to drive growth and expansion - Private Equity is worth exploring.

What are private equity investors looking for?

Simply, PE investors are looking for opportunities with the potential to deliver a substantial return on investment in a relatively short time. The rule of thumb is that they aim to double their money in three years or, treble it in five years.

As a result, PE firms look for specific attributes that will indicate the potential for rapid growth. These include, but are not limited to:

  • The macro-economic environment
  • Various micro-economic considerations such as value, growth, margins and cash conversion
  • The management team.

PE firms will then evaluate these factors relative to their strategy, appetite for risk and approach to working with and supporting portfolio companies.

How does a PE deal work?

Every PE deal is unique - each has a different structure, targets, and incentives.

In saying that, a universal attribute in each PE deal will set a benchmark for returns on investment for investors. If the benchmark is outperformed, the management team will share in the equity and value that is surpassed.

Conversely, in the event of underperformance against those agreed benchmarks, it can lead to investors becoming more active in running the business and making - sometimes drastic - changes to the management team.

You should ask your BDO adviser to help you understand the right kind of PE deal for you and your business.

What can I do to prepare for private equity?

A clearly defined vision for the success of your business is vital to the preparation of a PE deal. Clearly articulating what you want to achieve and what constitutes success underpins all the important decisions you, and other stakeholders consider; as you make your move to becoming a PE-backed business.

Secondly, PE investment usually leads to a substantial change in most aspects of a business. As such, you will want to prepare for due diligence. This can be initiated by completing a due diligence questionnaire, to better understand your reporting requirements. You should also check that your tax and financial structures are as efficient as possible.

What is the equity story or investment hypothesis?

Your equity story is the explanation of how your business intends to use PE investment to achieve the growth and return on investment that potential PE investors are looking for. The equity story is the foundation of your relationship with a potential investor.

The equity story will include an explanation of the opportunities for growth, the strategies to facilitate success and finally, who the potential buyers of the business might be when it comes to realising business gains.

What is 'debt story'?

Complementary to your ‘equity story’ is the ‘debt story,’ which evaluates the debt capacity of your business. If your business can take on cheaper debt, your blended cost of capital can be reduced. This, in turn, makes it easier to grow the equity value. The warning here is that over-gearing your business is a sure-fire way of destroying value. It equally needs balanced consideration. 

What if private equity is not right for my business?

PE is not the only option for funding growth. There are other options with their advantages and drawbacks. These can include loans, venture capital, public markets, IPO, retained earnings and even friends and family. These may be better suited to your business strategy and goals.

With all these considerations, it’s the job of your BDO advisor to help you find a compatible PE firm that’s right for you. At BDO, we can assist you when considering your options and help you find the right funding solution for your business.

Investor readiness tool

Still unsure if PE is right for your business? Try out our Investor Readiness Tool to determine if you are ready for PE.


How BDO can help

How we can help with private equity preparation

During this stage, you must articulate the equity and exit story you will take to investors. This includes formulating and finalising your business plan and marketing strategy - ensuring it communicates and supports your story with evidence and facts. It’s important to recognise, anticipate and provide plans to mitigate areas of potential risk and challenge.

You must take into account that typically you’re in partnership with your private equity backer for three to five years. Therefore, you must establish the PE deal fundamentals with thorough information to support your deal - including, agreeing on a timetable and approach with stakeholders.

BDO’s Private Equity Group prepares you for a PE deal with advice in all facets of your business to complete a deal, whether it’s assisting in formulating your equity story, planning resources or project management.

Our services include:

  • Defining what success means to you, your team and your business
  • Developing a robust business plan, including an underlying financial model with a returns analysis
  • Deciding on your deal strategy to match your goals, by looking at price, types of potential investors and timing
  • Creating plans and providing solutions to overcome operational issues
  • Building a secure and comprehensive online ‘data room’ with information and content for investors
  • Preparing the Information Memorandum and other accompanying selling materials
  • Preparing Vendor Due Diligence including tax and financial information
  • Analysing the PE market and tracking market activity to determine optimal launch point.

How we can help with private equity marketing

With stakeholders aligned around a clear definition of success and a business that is geared for sale, you are ready to take your investment hypothesis to investors and generate awareness and competitive tension.

The services we can provide include:

  • Build and rehearse a credible management presentation
  • Lead buyer interactions
  • Manage investor enquiries and multiple advisors
  • Identify and deal with difficult issues and questions
  • Understand and guide valuations to drive meaningful offers.

How we can help with private equity deal completion

Now is the time to move from a shortlist of potential investors to securing a deal with a single investor. Conversations will shift from informal to non-binding, to a final Sale and Purchase Agreement (SPA). This will involve legal, tax and financial advisors on both sides and a great deal of high-pressure negotiation.

The services we provide include:

  • Managing interactions with all legal, tax and financial advisers
  • Negotiating final offer to completion
  • Ensuring that risk and rewards are balanced
  • Delivering an optimal tax structure.

How we can help you grow

BDO’s PE group will generate ideas and insights to help you find the right way forward for your business. Below are the top six areas we provide advice and ideas on, which will help your company become a successful PE-backed business.

1. Performance and growth

We will help you refine your business strategy to drive top-line growth and improve margins. We can help define your investment priorities, whether it be through acquisition, people or technology, and ensuring that investment is effectively supporting accelerated growth.

2. Financial management and funding

Fundamental to efficiency and effective leadership is sweating every asset and every dollar. BDO can provide essential support to improve cash flow and the efficiency of your tax and financial structures. These improvements will make it easier to manage your bank and other funders and fund acquisitions.

3. Operational improvement

Investing in a review of your operations is a worthwhile activity. Our experience is that companies can drive greater growth, higher margins, better cash conversion, and reduced risks when they focus on operational improvements and efficiencies. We will help you benchmark your operational effectiveness, devise pragmatic plans that can be delivered within specified timeframes and finally, help implement any changes that are agreed on.

4. Governance and leadership

PE firms are looking for a good management team. Therefore, we often find the biggest impact comes from addressing any gaps in the management team. This can mean bringing in additional expertise in the form of Non-Executive Directors or adding PE experience to the management team. We will advise you on the appropriate and most effective governance structures aligned with the business strategy and ensure that your management team can deliver.

5. Risk, management and financial reporting

PE investors will demand high levels of management and financial reporting to monitor and measure success. The question is - are your systems up to the job? We offer specific advice on how to improve your reporting system. We also advise on regulatory compliance as new requirements become applicable. The aim is to ensure that you are minimising risks by implementing the right reporting and compliance structures.

6. Strategy

Your strategy is the foundation that all growth is based on. If your strategy doesn’t drive the growth in value you need, we can provide advice on developing or adapting it. More importantly, we can work with you to secure stakeholder alignment to deliver it.

How we can help with exiting and realising private equity gains

From day one of taking PE investment, you should have one eye on your exit and how you will realise the gains in value. Your initial ‘equity story’ should have had some indication of how exit would be realised, by identifying potential buyers for the business.

The process for securing a deal that realises gains and ends in your current PE investment cycle is largely the same as the one you went through to find your PE investor in the first place. Certainly, many of the key stages are the same.

There is, however, a single factor that changes everything. Any deal must satisfy your current PE investor’s need for the best possible return on investment. It will largely define the success or failure of your PE experience. It will also affect your choice of investor for the exit deal. This is why planning the exit from the start is important, so you’re on the same page as your investors.

A further consideration is whether you and your management team want to continue to manage the business. If you do, aligning interests on the choice of the next investor will be very important. Conversely, you may be looking for a complete exit, which may impact on the value of the business and returns your investors can make.

The BDO Private Equity group will provide you with all the support you need to complete the optimal deal at the end of a PE investment. Whether you are trying to exit, or want to continue leading the growth and development of your company, we will help you find the right way forward with your current PE house. This may range from a trade deal to a further round of PE investment, or an Initial Public Offering.

Meet our team

Martin Coyle

Martin Coyle

National Leader, Technology, Media & Entertainment and Telecommunications, Partner, Audit & Assurance
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Sebastian Stevens

Sebastian Stevens

National Leader, Private Equity
National Leader, Transaction Services
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