When is a private equity firm the best fit for your business
Question
When is a private equity firm the best fit for your business? And when is it not.
If you’re an entrepreneur, it’s likely your business was founded on your passion for a particular industry, innovation and/or service.
You may have specific skills and knowledge which, when put to good use, helped your enterprise to thrive.
But over time, the growth and success of your business may have naturally pulled you from the tasks and activities you’re passionate about and led you to take a more active role in steering the business as well as overseeing processes which have little to do with your reasons for starting the company in the first place.
An owner-manager of a business who is in this position may find that selling some, or all, of the company to a private equity firm presents the ideal pathway forward.
That’s because private equity investment allows owner-managers to monetise part of their interest in the business while retaining some ongoing ownership. By joining forces with a PE firm, an entrepreneur can lessen their day to day responsibilities in the business and realise some of the value of the company, whilst still enjoying the benefits of the company’s future growth and success.
In turn, private equity firms are often able to contribute to the growth trajectory of the business by providing capital and expertise, and thereby become a real aid in helping their portfolio companies to scale or gain competitive advantage in a challenging marketplace.
To demonstrate how this works, let’s consider the paths of two hypothetical companies.
Company A is growing quickly and approaching a turning point. It requires an influx of capital and needs to recruit fresh talent in order to reach new markets and take their business to the next level. After receiving advice and moving forward with a partial sale to a private equity firm, Company A gains an experienced and capable chairman and a clearer internal structure as well as growth capital, priming it for future success.
Company B has two owners who have different long-term goals. One of the owners is looking toward retirement while another is seeking to release some cash from the business so that their personal wealth is no longer tied up in it. Selling shares to a private equity firm enables a re-structuring of the business’ financials, while day-to-day responsibilities are redistributed across the remaining management team and new talent brought in by the PE firm where necessary.
Typically, private equity firms back experienced management teams to carry out ambitious but realistic growth plans over three to five years, with aims to divest following this period through a later full sale.
Entrepreneurs should also be aware that while selling to a private equity firm brings benefits such as realising value and access to investment capital, it will also bring aspects such as a loss of control, a lesser share of future profits and increased reporting requirements.
When private equity isn’t a good fit.
Private equity investment won’t suit every type of company. Since private equity firms’ success typically depends on achieving strong growth in profits over the investment period, they seek out already profitable businesses, holding a dominant and/or differentiated position in a segment of the market with positive underlying dynamics and with high growth potential.
Sam Miller, Partner at Clearwater Growth says, “Companies trading in crowded markets where there are a number of like-for-like competitors would be better matched with a strategic buyer, such as a competitor looking to horizontally integrate or a business in a related industry looking to expand.
“Entrepreneurs should also be aware that while selling to a private equity firm brings benefits such as realising value and access to investment capital, it will also bring aspects such as a loss of control, a lesser share of future profits and increased reporting requirements.”
Knowing yourself as an entrepreneur is key. Part of your plan may be to ultimately exit the company, particularly if you have been working in the business for decades and are not planning for family or employee succession. When selling an ownership stake in the business, this can allow entrepreneurs more time to spend on the projects and activities they enjoyed when they first founded the company or create an eventual pathway for exit.
No matter your objectives when selling a share of your company, having an adviser by your side can make the journey smoother and minimise doubt and stress throughout the transaction process.
“In my experience, there are many risks for entrepreneurs who are contacted directly by an investor, or group of investors, and decide to sell their business without the help of an advisor. It could be that shares of the company have been sold at a price under fair market value, or that developments have affected the momentum of the business post-completion. Having an experienced advisor by your side means having access to insights on the potential buyers and how they would conduct the business after the transaction. They will also work on your behalf to assess incoming bids, ensuring that the seller receives optimal value for the business they’ve worked so hard to build.”
Authored by.
I am a corporate finance Partner and head up the Clearwater Growth team. I have spent the past 18 years as an investor and lender to fast-growing businesses, with direct experience of debt, equity and venture capital having completed deals ranging from £2m to £50m.
I have sat on a number of boards as a non-executive director, raised institutional funds, and been part of the management team of three investment companies. More recently, I established and ran a new housing company developing affordable homes for first time buyers.
I have been surrounded by growth businesses for most of my working career and joined Clearwater Growth because I am passionate about working with growth businesses and entrepreneurs. I understand how hard it is being an entrepreneur and appreciate they want an adviser to fight for their business as hard as they do.
I have four children, all under seven, who keep me reasonably busy, but every now and then I do like to take on a challenge having completed the Birmingham Velo; a Guinness World Record for the longest game of Touch Rugby (lasting 33 hrs 33 mins 33 secs), as well as the occasional Wolf Run.
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