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Insider’s Guide to Private Equity

Media, Private Equity, Private Investment

Considerations in making the right decision for your business.

Owners of businesses of every size get multiple calls, emails, and letters from private equity (PE) groups weekly. These contacts can represent pivotal moments in a business’s journey, often as gateways to significant growth investment and liquidity for shareholders.

When PE groups reach out, seize the opportunity to gather information. Understand their interest in your business, objectives, and intended direction. Inquire about their valuation methods and the range they are contemplating. Remember that they are contacting you to gather insights and understand your business. Feel empowered to reciprocate by learning about their motivations, strategies, and the reasoning behind their outreach.

Exercise your curiosity, remember PE discussions require preparation and strategic execution to effectively showcase a company’s value proposition and build value with private equity buyers. The following are essential strategies and considerations in preparing for and navigating them.

How PE Works

PE firms source investment capital from various investors and seek to acquire majority or minority interests in privately held companies. Once invested, they work to accelerate the company’s growth by providing strategic guidance and financial resources. This growth often involves redirecting cash flow into management, infrastructure, and strategic acquisitions. PE firms leverage debt financing to support this growth, minimizing the need for costly equity.

Core Strategies in PE

PE investors employ three core strategies: Buyout, Growth Capital, and Minority Investments. Buyout transactions involve acquiring a majority interest in a business, while Growth Capital investments focus on accelerating the company’s growth. Minority Investments can encompass various scenarios, including funding buyouts or partnering with existing shareholders to drive growth.

Preparing for PE Calls

Presentation Matters: Beyond Financial Results

It is crucial to recognize that valuation is not merely about presenting financial figures, even though that is the main point from which private equity often starts. Your business is much more than the numbers, and conveying the comprehensive success of your business dramatically impacts value. When presenting financials, private company financials are typically geared towards operational and tax purposes; they may not inherently highlight the full potential and value of the company. Therefore, it’s essential to position your business in the best light, emphasizing growth prospects, success stories, and future financial outlook alongside past performance.

Educate Yourself: Understanding the PE Model

Before sharing information with a PE firm, take the time to educate yourself about the PE model and the specific firm you are dealing with. Understand their investment focus, portfolio companies, and recent transactions. Dive into their business strategies, growth trajectories, and areas of interest. This knowledge will enable you to effectively tailor your presentation and position your organization, showcasing how your business aligns with their investment objectives.

Control Timing: Prioritize Your Objectives

If you have decided it is time to execute a transaction and have a sense of urgency, it is essential to carefully consider what you want to achieve from a PE transaction. Take the time to evaluate whether the opportunity aligns with your goals and objectives. Clarify your priorities as a business owner: liquidity, capital infusion for growth, or an exit plan. Establishing clear goals will help you navigate the transaction landscape and identify the right partner under favorable terms.

Remember, where one PE group is interested, others will follow. Choosing the right strategic PE partner is a process. Do you know all the players in your industry? While many business owners think they know all the industry participants, there are far more than you realize in and near your market. In addition, there are over 6,000 private equity firms with over $1.3 trillion in capital to invest in companies. One of them may prove a better alignment for your business strategy, culture and even valuation. Maximize your options and potential outcomes by evaluating a range of possible private equity or strategic acquirers, do not just focus on the one that happened to call.  There are a lot more options than you may realize.

Get Help: Leveraging Expertise

Navigating PE transactions can be complex and challenging, especially for business owners embarking on their first transaction journey. Seek assistance from experienced investment bankers and M&A attorneys specializing in PE deals. These professionals bring invaluable expertise in evaluating, positioning, and guiding you through the transaction process, ensuring you maximize value and mitigate risks effectively.

How the Right Advisors Can Assist

Engaging the right team of advisors is critical in navigating PE transactions successfully. Having advocates who know the terrain and are familiar with the essential strategies and considerations for preparing for and executing PE transactions is vital for success. These advisors play a critical role in protecting your interests, managing time and timing, exploring options, and guiding you through the emotional aspects of the transaction process. From negotiating favorable terms to ensuring legal compliance and maximizing benefits while minimizing risks, their expertise is indispensable in achieving a successful outcome.

Preparing for and evaluating inquiries from PE firms requires careful planning, strategic execution, and leveraging the expertise of seasoned professionals. By understanding the nuances of the PE model, clarifying your objectives, and assembling the right team of advisors, you can effectively showcase the value of your business and navigate the transaction landscape with confidence. Successful PE engagements are built on a foundation of thorough preparation, strategic alignment, and collaborative execution.

Learn more about how to successfully navigate the private equity landscape in our comprehensive guide: Private Equity is Calling You! Now what?