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Which attributes do private equity groups find attractive in a business?

James Darnell
Profile Picture of James Darnell James, a partner at KLH Capital, is responsible for identifying, structuring and executing transactions; due diligence; financial analysis; and portfolio management. He is a member of the KLH Investment Committee and is responsible for all SBIC compliance. He serves on the board of directors for all KLH portfolio companies and is directly responsible for overseeing Federal Resource Supply Company.
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Which attributes do private equity groups find attractive in a business?


Private equity groups have a broad range of interests based on their investment strategy and the mandates they have been given by their investors of which types of businesses to invest in. These mandates include the size, maturity, growth investment, industry type, and state of the business. Such fundamental variables can change very much based on what the company’s charter is. With all of that in mind, there are a few common traits that most private equity groups are looking for.

The most important thing the private equity group is looking for is the business' ability to make money and to continue to exist and make money five to 10 years from now. They want to make sure that this is a company with real staying power, real franchise value and is delivering a valuable good or service to whomever the customers may be. In other words, they want to make sure that they are not investing in Kodak film as the iPhone is being introduced. They want to make sure their investment of business is going to be around for a while.

Next, the private equity group is going to evaluate things like the customer base. How big is it? How good are the customers? How long are the customer relationships? Is there any customer concentration? How are the customers' buying decisions made and what’s the nature of the order or the product being sold to the customer? Is it a big one-time sale or is it more recurring maintenance-type products or services being sold?

Those are really the most fundamental traits that a private equity group will want to understand, look at and are attracted to in a business. They will have lots of questions and things to understand about how the operations of the business works including suppliers, employees, and the technology. However, those are all secondary to the fundamental questions about the business model, customer service, and how it makes money, which are really the most important things.

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