10 Ways to Attract Private Equity
Private equity can be an excellent exit alternative for many mid-market business. Learn 10 ways to be more attractive to a private equity investor.
Recent financial data shows professional investors such as private equity groups are once again putting money to work in private mid-market companies. Business owners interested in tapping this vein still must clear a number of hurdles to attract private equity investors. The same goes for retiring baby boomers that decide the time is right to sell with middle market valuations on the rise.
In order to help business owners understand what it takes, here are 10 ways to add value and stand out from the crowd.
Audit Your Financials
Sloppy numbers sap value like a poorly tuned engine saps horsepower. You may find investors who will overlook holes in your financial reporting, but you won’t get top dollar. An audit shows a prospective buyer that you are serious about doing the little things right - which can be a powerful signal to send when you are in a negotiating process.
Fill Gaps in Your Team
No one can do everything well - including you. If you can’t be away for a week without checking in on routine problems, then you need a stronger team. This is especially true for private equity groups which almost always are looking for a deep bench when they are recapitalizing a company.
Diversify Your Customer Base
Many business owners are surprised to learn that customer concentration is a major knockout for sophisticated investors. But when businesses derive 40% or 50% of their revenues from one or two customers, a red flag goes up for potential buyers who don’t want the risk of losing a major customer. A good rule of thumb: no one customer should represent more than 10% to 15% of your revenue.
Create an Exit Plan
Sitting down with an investment banker and your other advisors (lawyer, accountant, financial planner, etc.) to plan your exit will eliminate confusion during the business sale process. Fred Wainwright, a certified exit planner at Ledyard Bank in New Hampshire, urges business owners not to wait for a life changing event to force the planning process. "We like to see owners start meeting with their advisors two to three years before a planned transition. That way the owner can act to fill the gaps so his business can become an A or even an A+ company."
Solidify Your Contracts
Everyone knows it costs more to get a new customer than to keep an existing one. Buyers will pay a premium for a business with customers under contract and/or recurring subscription type revenues. This is one of the reasons why companies with service contracts are so popular with investors today.
Build the Product Pipeline
If you want private equity to pay up for the future potential of your company, you need to give them a reason. Consider launching new products or entering new markets to show growth potential. The research you do as part of this effort will also help answer two of the BIG investor questions: (1) "How big is the market?" and (2) "How can you get more of the share?" Confident answers make it hard for buyers to walk away.
Get a Realistic Valuation
Your company will not trade at the same multiple as IBM, but it may be worth more (or less) than you think. Buyers will be armed with this information; to negotiate properly, you should be too. Your investment banker can provide you with a general range of value by providing recent transaction information. To truly get a handle based on your actual performance, you should consider a market assessment by a skilled professional or, in certain cases, a formal valuation by a certified appraiser.
Make an Acquisition
Buying another company is a big undertaking, but often is the fastest way to growth and leads to a more attractive exit upon successful integration. "There is certainly no playbook," says Glenn Fishler, who embarked on an acquisition strategy after 23 years of building his environmental services company one customer at a time. "If you’ve never made an acquisition before and you don’t have people inside the company to guide you, you’ve got to find all the help you can get."
Put Your Records in Order
The better organized you are, the easier it will be to attract investors or sell your company, and the less disruptive you will find the due diligence process. Time will start to speed up the day you accept a Letter of Intent from a prospective buyer. You will be asked for information about your company, your corporate structure, your stockholders, your employees, your customers and your legal affairs. Organizing these records beforehand will help keep the deal on track and, perhaps more important, reaffirm for the private equity group that they are making the right deal.
Protect Your IP
In our knowledge-based economy, intellectual property is more valuable today than ever. To support your business model, catalog your training processes, document your software, trademark your products, copyright your website and keep close tabs on your customer list. These are valuable assets and you want to make sure you get fairly paid for them.
So there you have it, 10 ways to attract private equity. I'm sure there are more, but more often than not, if you get these 10 right, you will bring to the table interested buyers who are more likely to see the deal through.
Written by Craig Allsopp
Craig O. Allsopp is an investment banker with Corporate Finance Associates, a full-service mergers and acquisitions firm with an office in Portland, ME and 20 other cities around the country. His practice is focused on creating growth and exit strategies for middle market companies in New England.