Demystify the Private Equity Journey

Private Equity enables growth-orientated businesses and their leaders to professionalise, grow and transform their business, facilitating entrepreneurial businesses to expand at speed. Typically,

Private Equity houses look for businesses where the quality of earnings are the high, and risk is low, meaning that Private Equity may not be suitable for all types of businesses. Although, in some cases, Private Equity houses may look for businesses in distress – known as 'distressed Private Equity'.

When considering whether to take on Private Equity, it’s worthwhile to follow the basic valuation model which looks at your business through four lenses:

  1. Revenue Growth
  2. Margin
  3. Cash Conversion
  4. Risk Quotient.

Businesses who can demonstrate their prowess in these four areas are attractive to Private Equity houses. But what does this mean practically? In this article we highlight 11 questions you should be asking yourself to determine if Private Equity is right for you, based on these four characteristics. For a detailed look at the model and to understand more about the Private Equity journey including the anatomy of a deal and aligning your agenda, Download our Demystify guide.


The top questions PE houses will use to determine if you’re right for Private Equity

Revenue Growth

1.  Can you demonstrate, or do you expect, future growth?
A company that’s expected to beat their peers through earnings or performance derived from a number of factors, including: record growth in sales or market and large customer base.

2.  Have you set the right price?
A pricing strategy that considers your business and its goals as well as your competitors will help increase market share. While there are a number of pricing methods, a business that perfects their pricing strategy and increases perception of their business value overtime can increase their prices and profit.

3.  Are you set up to maximise your brand and Intellectual property?
Brand and IP are often intangible, yet vitally important information that can give the business a competitive advantage. This includes patents, trademarks, trade secrets, copyrights and brand.

4.  Do you have a social media and an online presence?
Businesses that actively pursue an online presence and social media can better drive commercial value and build sales. Through maintaining a social and online presence, businesses can build communities and advocates for their brand, as well as harness intuitive technology and feedback with the overall impact of gaining new customers and retaining old ones.


5.  Do you have an efficiency or productivity issue?
Particularly, in today’s environment, some PE firms will look for a business in distress to turn around, or operational issue inefficiencies that, once improved, can unlock value.

6.  Are you prioritising the right cost controls within your business?

Cash Conversion

Knowing the primary value drivers within a business can reduce non-value drivers. Prioritise areas that give value for customers and control costs for the areas that don’t - ultimately this adds value to a business.

7.  How much working capital do you have?
Not all profits are created equal – how well a business can convert profitability into cash is a key area PE investors will be looking for to fund future growth.

8.  Is your business in the best structure that it can be in for tax?
Private Equity firms will look for companies where a deal is set up in the most tax efficient way to ensure that time and money is saved on exit.

Risk Quotient

9.  Do you have quality documentation?
The highest valued businesses have robust documentation across all areas of the business. This includes: visibility of earnings; corporate governance, policies and procedures and other management information.

10.  Do you have a strong management team?
Strong management teams prioritise objectives and understand how they can be aligned with a PE investor to ensure rapid growth plans stay on track. They are diverse, technical teams that have a clear vision for the future, with open communication and mutual respect.

11.  Are you set up to scale?
Scale is a proxy for safety. A Scalable businesses can meet future demands quickly and generally have technology, systems and processes in place to support growth.

BDO have created a four-part educational series: Private Equity - knowing your next move, a practical set of guides to help you understand the PE process and realise your business objectives.


If you are interested in how BDO can help prepare you for Private Equity, please get in touch with our Private Equity team.