How can private equity investment help your business?
Private equity (PE) can be a very useful way for a business to bolster its financial backing, and in this article I briefly cover how it can be implemented in an effective way, writes Luke Hanratty, Director, Saffrey Champness.
The transition from an owner-managed business to one answering to external shareholders can be a challenge. For instance, PE backers will typically require monthly management information which focuses on both short and long term cashflow.
Expanding your management team to ensure you have all the required skills can be helpful, and having a Finance Director in place to manage the transition enables other members of the team to remain focussed on core operations.
Preparation for an expected PE injection by getting compliance processes in order can be of real benefit, whether that be cash forecasting, audits, contracts or data protection.
A good corporate finance adviser can help to ensure processes are as efficient as possible in advance of any investment, while being able to test due diligence to identify issues in advance.
It’s crucial to remember that PE investors are looking to buy into the future growth of a business, so the smooth running of internal processes is important, but focussing on the core operations and revenue growth is vital.
Why is vendor due diligence important?
This step is fairly standard procedure for larger transactions, as it can give any prospective investor an insight into the business. However, investors typically interpret it as being favourably slanted towards the vendor, and so follow-up work is inevitable which can add to the transaction costs.
A Seller Information Document can be more favourable as it has a more limited scope and focuses on the key financials and areas identified as being of higher complexity.
Key criteria for private equity investment
The first element is a strong core management team. Any good PE house will be looking to have a long-term relationship with management, so having a trusted, secure team in place can be big selling point.
Beyond this, investor confidence in the business delivering the expected growth in the market space is important, and this extends to a potential future exit strategy.
Ultimately, the PE investors will consider the investment from the viewpoint of the exit plan and work backwards from there.
Advantages of private equity over debt financing
The key advantage is the buy-in of an interested and experienced investor who has the skills and experience in growing company value, eventually working towards an exit event.
While a bank will typically be focussed on quarterly covenants, a PE investor can be more open to taking a long-term view. Utilising both of these approaches may be possible with PE investment for strategic growth, and bank financing for operational needs. But, the presence of a PE backer can help secure contracts and enable faster scalability.
To find out how we could help you, please contact:
Luke Hanratty, Director:
01494 416069
