Choosing a private equity investor

Steve Harrison
Portfolio Director, YFM Equity Partners

Taking on private equity investment can have a transformational impact on your business, not only in terms of the funding provided but also through the value an investor can add through their input.  PE investors should be experts in business growth and transformation.   They will have experience of what growth strategies work, pitfalls to avoid, they will have networks to call on should you need additional help and as professional purchasers of businesses themselves they are skilled in grooming or developing businesses to make them attractive for sale which will help in ultimately realising value for all shareholders.

However, the decision by any business owner or entrepreneur to bring in an external investor is not to be taken lightly.  The relationship with your new investor will be one of the most important for your business so it is important to choose the right partner.  Obviously, the financial terms of any deal are important, how much funding, the equity stake and on what terms etc.  This is often the key focus at the time of the deal, however there are many more non-financial considerations to bear in mind to ensure you choose the right partner and these are at least if not more important than the detailed financial and legal terms themselves.

Chemistry

You’ll be spending a fair amount of time with your investor over several years.  Can you see yourself developing a successful relationship with the individuals involved?  Do you trust them? Are they straight talking? Do they share your values? Do you know who you will be dealing with post-investment?  Do you think you will enjoy working with them – will it be fun even?

Experience and track record 

An investor usually needs to be able to offer more than just capital.  They will undoubtedly do their due diligence on you and your business, it is important you should do your homework on them.  How long have they been investing?  Is their funding committed and readily available or will they need to raise it which is riskier? Are they able to provide further financial support if needed and do they have the appetite to do this? What is their track record of success and how in particular can they add value to your business over and above the capital they will be providing?  These are all important questions and it is wise to seek references from your investor as part of this process.

Approach

Private equity investors come in many shapes and sizes and all have different approaches to managing their investments.  Some like to take control and will be interventionist, others will be hands-off and distant and many will be somewhere in between.  Some are sector specialists others are generalists. These different approaches all have their benefits and disadvantages.  Be sure to understand your investor’s modus operandi and assess whether it suits your requirements.  Do they share your enthusiasm for your business?  Do they have an office local to you which will make them more accessible?  Will they be engaged, devoting the time you feel appropriate for your business? An important question to consider is how your investor will react to the inevitable set-backs and challenges along the way? Will they be supportive in such circumstances or nervous and overreact?

Objectives

Ensuring you are on the same page as your investor from the outset is crucial and whether they have the necessary flexibility should circumstances change. Do your prospective investor’s objectives align with yours? Do they buy in to and support your plans? Do you share the same objectives in relation to a future sale or exit and are you agreed on the timescales involved?  This latter point is particularly important.  Does the investor back your plan, or is there a risk they will be holding you back or push you to expand more aggressively than you feel comfortable with or looking for the door before you wish to exit?

In summary if you address the above questions and find the right partner then working with a private equity investor can have a transformational effect on your business, providing vital access to capital for investment, and additional skills experience and input to help you and your business grow, prosper, create jobs, access new markets and ultimately enhance value for all stakeholders.

 

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