Taking on private equity investment is at once the most exciting and daunting decision a management team will make, as the scores I’ve worked with over the years have told me.
The journey there will differ from business to business, with each having a unique nature, market and operating context. But there are five fundamentals every firm should consider if it is looking to explore private equity investment.
1. What’s the story?
As an investor, the number one thing we look for is a growth story. A strong track record of performance suggests that a management team can likely guarantee success over the lifetime of a private equity investment.
The chief executive’s track record is particularly important. Have they built a business before? If not, do they have what it takes to deliver their plans? These are the question we ask.
It’s not the size that counts: so long as numbers are moving upwards then there’s a good story to tell.
2. Paint a picture
The best entrepreneurs always have a goal they’re working towards in the mid-term. It might be a sales target to hit in five years’ time, a problem to solve or an industry to disrupt.
A clear articulation of your vision and the strategy you’re going to deliver to get there is essential. That said, the best leaders build in sufficient flexibility in case their market moves.
On the investment-side, we begin by taking time to get to know the business, to truly understand it and the market it operates in. It’s only if the leadership’s vision and strategy makes sense to us after this process that we know whether it is one to back. The numbers, while critical, come next.
The figures will always vary. But, if you have a plan to out-perform your market and beat your peers then people with equity will always want to back you.
3. Get the crystal ball out
If the strategy is executed and vision delivered, what’s the impact on your forecasts? Few investors will consider you unless you can show, three years from now, what the shape of your business will be.
Forecasts must be accurate, based on your performance so far and framed within a realistic scale of what can be achieved. Assessing how market dynamics will affect things and how customer demand might change are both key to this.
Jon Wood, commercial director at snack maker Seabrook Crisps offers some sound advice: ‘Investors want to know that you have a strategy to deliver your vision. But you must also be able to demonstrate some flexibility in case the market moves.’
As the saying goes, cash is king. High growth businesses are cash-hungry so forecasts need to demonstrate an ability to stay in the black. You should also have a detailed idea of how you will use any external investment.
4. Strengthen the bench
Realising the vision will take more than one inspirational entrepreneur and their PE-backer. It takes a whole team.
We’ll often meet businesses blessed with a great sales person at the helm but these individuals can sometimes be naturally less-focused on the seemingly dryer, but nevertheless critical, areas of infrastructure and process.
One of the greatest benefits of gaining an investment partner is accessing their network, particularly non-executive directors. Think about where there are gaps and be honest about the strengths and weaknesses of your team.
Focusing just on senior leadership is also a mistake. Investors like to see that you’re nurturing the next generation through proper talent mapping and succession planning.
5. Map all the risks
Stuart Miller, founder of supply chain tech business ByBox, sums this up best: ‘Don’t be scared to surface dark thoughts about what might go wrong. It shows you have properly thought through your plan and are prepared to deal with risks as they arise.’
Think about the lifetime of the investment and what might occur. This tells you and your investment partner how much flexibility you’re going to need. And some markets are naturally volatile or cyclical. That’s not a barrier to investment – just have a plan for how you’ll navigate the peaks and troughs.
Andy Grove is head of new business at private equity firm LDC.
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