Is Private Equity right for my company?
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.
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.
Understanding Private Equity
Our Demystify, Navigate, Accelerate and Realising series supports private businesses looking to understand the world of Private Equity.
These brochures provide expert guidance and BDO tips for each of the Private Equity lifecycle stages. Our goal at BDO is to help you make informed decisions for your business to set you up for long-term success.
If you think Private Equity could be right for your business, please get in touch so that we can support you.
Private Equity at a Glance
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.
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 advisor to help you understand the right kind of PE deal for you and your business.
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.
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.
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.
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.
Ready to make the next step? Please get in touch with our team.