I've been in hundreds of conversations with private equity groups. I love to hear their lingo, and the terms that get them excited when they are analyzing a potential platform acquisition. I often coach my clients to drop some of these terms when meeting with a private equity firm. And when they do, I give a mental fist pump. Why? Because in many cases, the use of a few buzzwords can increase the valuation for my client's company. If you are considering taking on private equity or investors in your business, I encourage you to work some buzzwords in your discussions. I promise, the private equity firms will love to hear how they are relevant to your business.
Here are 10 of my favorites.
Stickiness is anything about a business that keeps customers from leaving to a competitor. A more technical term for this is "high switching costs," which describes when customers incur a monetary cost or a perceived inconvenience in moving from one product or service to another.
Use in discussion: We have created stickiness for our products by adding a long-term service component to our sales contracts
Proprietary means that your business owns something that gives it an advantage over competitors. Technology, service delivery or manufacturing processes could have proprietary elements within a business. If you drop this term, just be sure that you can explain the advantage in terms that private equity will really understand: How it will generate higher free cash flows.
Use in discussion: We have developed a proprietary technology that allows us to sell our product for a higher price.
Defensibility relates to a company's proprietary elements, but it describes how a business will maintain its competitive edge. Strategies and tactics around defending your business' advantages need to be thoroughly thought out and communicated succinctly. The more defensible your competitive edge, the more successful your business is likely to be.
Use in discussion: The defensibility of our award-winning services will be maintained through our continuous reinvestment into research and development.
Runway refers to the amount of growth that a company still has within its market. Private equity looks for market leaders (top-three positioning) because that often means proven products and good management. Market leaders with lots of runway usually translate to a great investment for private equity.
Use in discussion: Our market is still in its infancy, so the runway for growth is significant.
Visibility relates to a company's ability to accurately measure future revenue and costs. Many companies claim to have visibility, but companies that can back up those claims with long-term contractual customer or supplier agreements are the darlings of the private equity world.
Use in discussion: Visibility for NTM revenue is high because of our three-year subscription agreements with customers.
Fragmentation means that there are many small players in an industry with no one dominant player. As soon as private equity hears this term, they think roll-up strategy. In a roll-up, private equity firms create value by acquiring smaller businesses and combining them into a much larger entity with critical mass that will command a higher valuation multiple upon exit.
Use in discussion: The fragmentation in our industry allows us to pursue an aggressive roll-up strategy that will quickly increase market share.
Scalability refers to a company's ability to significantly increase revenue without having to increase costs at that same rate. The result is more free cash flow available for investors. When a company can quickly "scale up," it usually means it has the processes and infrastructure in place to handle growth. High scalability is sometimes said to be the holy grail for a private equity investment.
Use in discussion: Our standard employee training system allows us to quickly open stores in many different regions and increases the scalability of our business.
Diversification indicates that a business does not depend on any one area within its operations. Suitable private equity targets demonstrate diversity in customers, suppliers and product/service lines. Diversification equates to less risk for buyers in the event of a loss in these three areas. Less risk usually equals higher value.
Use in discussion: Our company has lots of diversification with no customers accounting for more than 5% of revenue.
#9 Invested Management Team
Invested management teams indicate a group of individuals committed to the success of the business. The question to answer for a private equity group is, of course, how they are invested. Demonstrating that a company's management is tied in monetarily is a good place to start.
Use in discussion: Our management team has invested over one million dollars of their own money into the development of this software.
#10 Cost Advantages
Cost advantages are achieved through a firm's ability to produce a good or service more cheaply than its competitors. This could be due to access to cheaper supply, higher efficiency, skilled labor force or superior technology. As already mentioned, you must prove that these cost advantages will continue to be proprietary and defensible.
Use in discussion: Our long term supply contract gives us a cost advantage which equates to a 5% higher gross margin over our competitors.
A Word of Caution
Don't use too many of these buzzwords in your conversations with private equity groups - limit yourself to two or three. Any more than that and the potential buyer will surely know that you are just trying to impress them with jargon. Also, be sure you don't just drop these terms without having the support to back them up. Be prepared to give tangible evidence or examples of how you can deliver on these concepts. That's what will really help you knock your company's valuation out of the park.