How to Make Your Business Attractive to Private Equity Firms

How to Make Your Business Attractive to Private Equity Firms

by Kory Boyer, MBA

March 1, 2022 - In many industries, we are seeing a growing presence of private equity groups as potential buyers in the lower to middle markets. If you are a growth-oriented company that needs an influx of capital to focus that growth, and whereas traditional funding may not be as viable of an option, a private equity buyer may be more attractive for you. However, there are lots of things to consider. Your CPA firm’s M&A advisory services team can provide deeper insights into a private equity sale to help you sort through the pros and cons.

Why Would You Want to Attract a Private Equity Buyer?

As a business owner, you may want to establish a relationship with an entity that has greater access to capital to fund continued corporate growth. Toward that end, you may think in terms of a strategic buyer or a financial buyer, however, the right private equity buyer can provide more benefits than just access to capital. They can also:

  • Allow the current ownership group to cash-out, diversify their financial holdings and inherent risks, and continue with the business to support the projected growth.  
  • Bring more to the table, such as key relationships, strategic advice, tools to improve operations, and/or enhanced ways to drive revenue.
  • Assist in sourcing talent in a different way – in effect serving as a recruiting intermediary by reaching out through their own networks to talent the business would not otherwise meet.

How Can You Make Your Company Most Attractive to a Buyer?

Even if your company is experiencing increased growth and profitability, and you have a solid leadership team, you will need to understand what private equity firms are really looking for through their eyes. You will need to be prepared to tell your story through strategy, past and prospective performance, operations, infrastructure, risks, and personnel. Your advisory team can help you put your best foot forward to articulate these key aspects:

  • Strategy: clear strategic vision, key insights of the market, positioning in the market and key risks, and how your firm is differentiated from competitors. 
  • Growth: strong plan for growth that incorporates a deeper understanding of the customer, market potential, and multiple avenues of growth through organic and inorganic paths, along with costs to achieve this growth.  
  • Senior management team: Capabilities of the key leaders within the organization.  
  • Financials: Private equity buyers are looking for stable and reliable cash flows, in which it is extremely important to understand your revenue base and β€˜stickiness’ of customers, costs of goods/costs to serve, and your costs to run the business (people, process, and technology).  
  • Managing the business: Be able to articulate how you manage and track the business through metrics or methods, to include aspects of financial, operational, and customers.

Overall, you should understand that they are looking for opportunities to fine-tune your model to make it even more profitable, make improvements to add value, and understand how you would use the additional capital to grow your company. It will be important to be able to discuss:    

  • Customer opportunities: expansion of current customer revenue through enhanced customer value or expansion of revenue through new customers. 
  • Cost of goods: opportunities to improve COGS.
  • Operating costs: potential areas to drive greater efficiencies.
  • Asset utilization (where appropriate): increase productivity of assets (decreasing maintenance time or changeover time, etc.).

Are You Sure Private Equity Funding is the Right Move?

Before you choose to potentially be acquired by a private equity buyer, be sure you’re going in with your eyes open. Just like any other relationship, it takes a good fit to develop a lasting, successful affiliation, and PE investors can vary significantly. You will want to consider these PE-related issues:

  • The PE firm will in some form become a working partner – representatives of their firm will take an active role in operating your company and making decisions, including at the board level. Personalities and cultural fit can make or break your deal.
  • Understand the PE firm’s typical behavior – are they focused on strategic growth or is it more financial engineering? It is important to understand what the PE firm’s plan is concerning leverage, headcount reductions (if any), severing non-core assets, etc. 
  • Senior management incentives – typically key personnel are retained post-purchase, although the top 3-5 may get a new employment agreement that incentivizes them to drive the business to higher levels. If you don’t perform, you could be out.
  • How will you maintain your company’s culture and sense of identity? – The new people your PE buyer brings in to help run things will be highly invested in making your business more profitable, but they may not feel personally invested in your company as an entity. That can negatively affect morale.

A private equity investment may be exactly what your business needs. A sale of your company is extremely exciting and stressful as most people have not been involved in a sales process, but it is not a new experience for PE buyers. 

You need to approach with a full understanding of the pros and cons of entering into a transaction with a PE firm. Sellers should consider arming themselves with third-party advisors, whether it be through a consultant, counsel, or investment banker. Third-party advisors can help set the foundations of success by keeping both parties aligned to a fair and efficient process, and ensure that you are obtaining the best deal possible. With a trusted advisor by your side, you’ll be able to show your company in the best financial light and align with the best path for you going forward.

selling your business

Kory Boyer, MBA

Kory Boyer, MBA

Kory Boyer, director, leads the Corporate Growth Strategy and Performance Optimization advisory practice areas. He partners with companies in numerous industries to assist in areas including inorganic and organic growth strategies, along with the full spectrum of mergers and acquisitions from target identification, due diligence, transaction management, and integration. Kory also helps clients evaluate operations and processes, to help drive improvements through performance improvement and optimization strategies. He completed his undergraduate studies in Mechanical Engineering at the United States Military Academy and earned his M.B.A. in Finance at Gies College of Business at the University of Illinois at Urbana-Champaign. Kory joined Redpath and Company in 2021.