Attracting Private Equity Think big think bigger

Business owners looking to exit may be missing out on top sale prices by failing to consider private equity as an option.

The latest data suggests that Australian private equity firms are cashed up and ready to invest in mid-market businesses.  According to The Australian Private Equity and Venture Capital Association, there’s approximately A$6 billion of uncommitted capital in Australian funds waiting to be invested in the long to medium term.

With capital in the bank, deals are taking place.  On a global level, Dealogic reports that leveraged buyouts are at their highest since 2007 when they reached US$593millon. Yet the private equity market has changed since pre-2007 days, with fewer fund managers seeking the so called ‘mega-deals’ associated with the era.

With private equity providing strong returns on smaller transactions, the appetite for mid-market businesses is high, and competition is fierce. Over the 5 years from 2009 to 2014, the number of mid-market M&A deals (those up to a value of US$50m) accounted for 59% of all transactions.

For an existing business owner, the environment may be ripe for maximising the price of their business on sale.

What do Private Equity firms look for? – Finding your growth story

Generally, Private Equity firms look for two key attributes in an investment opportunity: capable management they can back, and an attractive growth story which can use their capital to maximise growth and market opportunities. Indicators of a good ‘growth story’ include a mid-to-long term strategic plan, experienced management team and track record and sustainable market opportunities.

These attributes are particularly important for those business owners seeking a partial sale of their business to private equity. Private equity’s appetite to partner with business owners, rather than acquire 100% is supported by research that shows over the last seven years to 2014 the number of partial sales of mid-market businesses (under a value of A$20million) increased by 13%.

Growth, a key requirement for private equity, can become challenging to outline and support, particularly as a business owner moves closer to retirement. With one eye on exiting the business, it can be difficult to maintain a passion for expansion. This commonly coincides with a decreased appetite for risk, as owners are more inclined to direct capital into assets such as superannuation. 

Consequently, many businesses become static; there is minimal investment and a reduction in strategic long term strategic planning. Without these foundations in place, an otherwise solid business may lack an attractive ‘growth story.’

When considering selling to a private equity firm, it is critical to step back and review your business from an objective perspective, reflecting on what it takes to meet their stringent investment criteria.

Tips to attract private equity firms

  • Develop a mid to long term business plan – the business needs to continue after you’ve left.
  • Appoint a capable management team to deliver on the business plan 
  • Develop detailed and realistic financial forecasts – regardless of how good your historical financial results are, a private equity firm is investing in the future. Realistic forecasts will assist in providing confidence and highlight your understanding of capital required. 
  • Demonstrate that there is a sustainable and growing market – provide insights into future market trends and competitor analysis, and prepare evidence of how your business will be able to take advantage of any changes in the market to grow its business.
  • Be prepared to take a risk – If the business requires reinvigoration, the business owner must be prepared to back the changes required.

For assistance in developing an exit strategy please contact your local William Buck advisor.

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