How private equity can help you to stage your exit

So you’ve spent the last 5, 10 or more years building up your business. You should feel pretty comfortable, but all your wealth is in the business and the mortgage or school fees still loom large on the wrong side of your personal balance sheet. But you aren’t done yet, there is plenty of growth left, plenty of opportunity, and you’re not ready to sell. So is there something in between?

Well… it would be a short article if there wasn’t, so the answer is yes… private equity!

I realise that for a lot of people, private equity conjures images of the devil in a smart suit. And I certainly can’t vouch for everyone in the private equity industry, but for those firms that operate at the lower and mid-market level, they are lot more like you than you would imagine. Many of them have spent their careers working with, or running SMEs, and they are passionate about building businesses. Of course they want to make money, but if the deal is structured in the right way, they make money alongside you, not at your expense. Not convinced… read on to see how they can help…

How does the deal work?

With so much potential left in the business, you don’t want to sell it all today. Very few corporates would consider buying anything less than 100% of the business. And if they do, you will be tied into a pre-agreed price or formula for the balance of the shares at some future date, which may or may not give you much upside at that point in time.

With private equity you can split this process into two steps, by bringing them in as a partner for maybe 40-60% of the business for this transaction. Then, with an agreed business plan in place, together you can build the business, develop a succession plan and be in a better position to secure a strong trade sale value in 3-5 years.

The key things they will look for are the basic building blocks of:

• A good quality business, well run with a good management team;
• An attractive sector with good growth opportunities, either organic, or through consolidation;
• A well thought through business plan as to how your business can capture those opportunities.

What will they be like as partners?

You’ll need to work with the private equity house, you will be partners. But they won’t just sit back and enjoy the ride. They will take an active strategic role in the business, and can help in a number of ways:

• • Access to additional funds: They are a strong financial partner who can provide additional funding for perhaps an acquisition or an expansion of your facility.
  • Better banking support: Getting a bank to support your growing business can still be a challenge, but with a private equity backer this is an easier discussion.
  • Help with recruiting and succession planning: You may need to add key people to your team, or you may want to develop a succession plan for yourself. In both cases private equity houses have their own networks of recruiters and individuals which can often give you access to better quality candidates.
  • Operational discipline: you might run a fantastic business, and while they won’t take over day to day control, they will provide valuable insight and advice from a position on your board.
  • Drive the next exit: they don’t want to be investors forever, so they will take the lead in generating a sale, with the best possible return for all shareholders (you and them), usually in a 4-5 year timeframe. And as far as you are concerned – if you have a succession plan in place you can also exit at that point, or you can stay on for another cycle with a new owner.

So is it an option?

Private equity doesn’t suit all businesses. But if you have a robust business with an exciting growth plan, but just want to share the risk a little, you should give private equity a thought.

Please do get in touch if you want to discuss whether it is suitable for your business.

Sarah Moores