Attracting Private Equity: Strategies For Successful Investment

Private equity can be a great way to grow your business, but it's not always easy to attract investment. Here are some tips to help make your business more appealing to potential private equity investors:

- Create a detailed business plan: Outline your company's goals, current operations, and capacity for a return on investment.

- Protect your intellectual property: Secure your intellectual property with trademarks, patents, and copyrights to reassure investors that you've taken steps to safeguard your business assets.

- Demonstrate market potential: Show off your competitive advantage, market potential, and opportunity for financial returns.

- Maintain meticulous records: Keep detailed records of your business's inception, operations, finances, and history to demonstrate commitment, reliability, and strong management.

- Outline an exit plan: Private equity firms typically support businesses for around five years, so providing a clear exit strategy will help take your business to the next level.

- Diversify your customer base: A wide customer base demonstrates growth potential and reduces the risk of losing a major customer.

- Solidify your contracts: Buyers will pay a premium for a business with customers under contract and/or recurring subscription-type revenues.

- Audit your financials: Sloppy numbers can sap value. An audit shows prospective buyers that you're serious about doing things right.

Outline an exit plan

When it comes to attracting private equity investment, outlining an exit plan is crucial. Private equity firms typically support businesses for around five years, providing capital and strategic guidance to help them grow and achieve key organisational goals. Therefore, it is essential to provide investors with a clear and compelling exit plan pathway. Here are the steps to outline an effective exit plan:

Selling shares as part of an Initial Public Offering (IPO)

An IPO involves listing the company on a public stock exchange and selling shares to the public. This strategy can generate significant returns if the market values the company highly. However, IPOs have become less frequent due to high costs and stringent regulatory requirements.

Securing a strategic acquisition

Selling your business to another suitable company, often known as a trade sale, is another exit option. This involves selling your stake to a strategic buyer, such as a competitor or customer. While this approach can lead to a quick sale and potentially high valuation, finding a buyer who values the company appropriately may be challenging.

Allowing private investors to sell their stakes

This step involves selling the private investors' equity stakes in the business to another private equity firm. This exit route, known as a secondary buyout or secondary sale, allows private equity firms to realise investment profits without going public.

Repurchasing equity stakes from private investors

The business can also choose to repurchase equity stakes from private investors, providing an exit opportunity for those investors.

Liquidating company assets

Liquidating company assets is typically a last resort option. This process involves selling off the company's assets individually and returning the proceeds to investors. However, this approach usually results in low returns and can be lengthy and complex.

When outlining an exit plan, it is essential to consider the investors' time horizon and risk appetite. For instance, a longer time horizon may favour an IPO or trade sale due to the potential for higher returns, while a shorter time horizon may be more suitable for recapitalisation or other quicker exit options. Additionally, market and industry trends, as well as the target company's performance and potential, should be factored into the decision-making process.

Diversify your customer base

Diversifying your customer base is a crucial step in attracting private equity investment. It is risky to have a large number of customers who are too similar and could be affected by similar changes in the market. For example, if your largest customers are all based in the same country, an unfavourable change in the exchange rate could see them all drastically reduce their orders.

A good rule of thumb is to ensure that no single customer accounts for more than 10-15% of your revenue. This is because investors view customer concentration as a major red flag. If a large proportion of revenue is derived from one or two customers, potential buyers will be wary of the risk of losing a major customer.

• Expand your public relations efforts: Get media attention and reach out to people who may not have heard of your company otherwise. Send press releases to relevant media outlets to generate interest and improve awareness among a wider network of customers.
• Request referrals and testimonials: Ask existing clients to refer you to others who might be interested in your products or services. Testimonials on your website can also help attract prospects by highlighting how your company has assisted critical clients.
• Expand into new markets: Consider advertising and selling your products and services to clients in different niches, sectors, or geographical regions. For example, if you sell to consumers in the hotel industry, consider targeting customers in the office, leisure, commercial, or retail sectors.
• Experiment with cold calling: Cold calling may appear archaic, but you may find a small number of people who are eager to listen to your pitch. Even a 5% response rate over several days and weeks might build up to 10, 20, 50 or 100 new clients.
• Form strategic alliances: A strategic collaboration can help your company develop a new product or service, improve brand awareness, access a new target market, and grow geographically.
• Emphasize networking: Attending industry events and approaching industry experts can help you cultivate professional contacts and create personal ties, which can eventually lead to sales.

Solidify your contracts

Contracts are an important aspect of any business, but especially so when seeking investment from private equity firms. By solidifying your contracts, you not only create a more stable and predictable revenue stream but also demonstrate to investors that your business is worth investing in.

• Review your existing contracts: Go through all your current customer and supplier contracts to identify any areas of improvement or potential loopholes. Ensure the terms are clear, concise, and favourable for your business.
• Standardize your contract templates: Create standard contract templates for different types of agreements, such as sales, services, or partnerships. This will not only save time during the contract creation process but also ensure consistency and reduce the risk of errors.
• Include key provisions: Make sure your contracts include essential provisions such as payment terms, delivery or service timelines, confidentiality, dispute resolution, and termination clauses.
• Negotiate favourable terms: When entering into new contracts, negotiate terms that benefit your business. For example, you could negotiate longer-term contracts, higher prices, or more favourable payment terms.
• Get legal advice: Consult with a legal professional experienced in contract law to review and advise on your contracts. They can help you identify any potential risks or issues and ensure your contracts are compliant with relevant laws and regulations.
• Monitor contract performance: Regularly review the performance of your contracts to ensure that both parties are meeting their obligations. This will help you identify any potential issues and take corrective action if needed.
• Build strong relationships: Fostering solid relationships with your customers and suppliers can help strengthen your contracts. Good relationships can lead to more flexibility, mutual trust, and a greater willingness to work together to resolve any contract-related issues.

By solidifying your contracts, you not only create a more stable foundation for your business but also make your company more attractive to private equity investors.

Maintain meticulous records

Maintaining meticulous records is essential for attracting private equity investors. It involves keeping detailed and well-organized documentation of your company's dealings, including its operations, practices, and financial health. Here are some tips to help you maintain meticulous records and attract private equity investment:

Establish a Corporate Repository

Create a central repository for all your company's important documents from the very beginning. This repository should be well-organized and regularly updated to ensure easy access to information. An online database, such as a virtual data room, can be an excellent solution as it provides a secure and easily accessible platform for storing and managing records.

Facilitate Due Diligence

Private equity investments undergo rigorous due diligence, where investors closely scrutinize your company's financials, operations, growth potential, and market dynamics. Well-maintained records will not only make this process smoother but also demonstrate your company's commitment to transparency, strong management, and reliability. Ensure that your records include all relevant information, such as business inception, operations, finances, and organizational history.

Protect Your Intellectual Property (IP)

Intangible assets, such as intellectual property, are crucial for the success of your business. Ensure that you have the necessary trademarks, patents, and copyrights in place to protect your IP. This demonstrates to investors that you have taken the necessary steps to secure your business assets and protect their value.

Comply with Regulatory Requirements

Stay compliant with regulatory requirements and industry standards. Private equity firms will expect you to have the right filings and applications in place. This demonstrates your company's commitment to legal and ethical business practices, reducing investment risk and building investor confidence.

Utilize Databases and Online Tools

Take advantage of modern technology to maintain your records. Use databases, archives, and other online tools to keep track of your records. These tools can help you stay organized, secure, and easily accessible. Regularly back up your records to prevent data loss and ensure that your information is up-to-date.

Foster Transparency and Trust

Maintaining meticulous records fosters transparency and trust between your company and potential investors. It demonstrates that you have nothing to hide and are confident in your company's operations and financial health. This trust is essential for building long-term relationships with private equity investors and can significantly impact their investment decisions.

In summary, maintaining meticulous records is crucial for attracting private equity investment. It demonstrates your company's professionalism, reliability, and strong management practices. By establishing a well-organized corporate repository and protecting your intellectual property, you can facilitate the due diligence process and reassure investors that your business is worth investing in.

Protect your intellectual property

Protecting your intellectual property (IP) is crucial when seeking private equity investment. IP can be tricky to identify and protect, but it is often integral to your business, so it's important to get it right.

IP covers a range of intangible creations, such as domain names, company designs, and software. It is a valuable asset and can be protected in several ways. Trademarks, patents, and copyrights are all essential tools to secure your IP. Additionally, keeping detailed records of your IP and ensuring the right internal operations are in place will also help safeguard your IP.

By taking these steps, you can reassure private equity firms that you have prioritised protecting your IP and, by extension, your business assets. This will increase your appeal to investors and demonstrate your commitment to securing your business's value.

In addition to protecting your IP, it is also essential to have a clear plan for how you will work with investors to improve operations and maximise profitability. Private equity firms will be looking for bold, ambitious leadership, so be prepared to demonstrate your growth strategy and how you plan to expand your market reach.

Frequently asked questions