Benefits and Pitfalls of Injecting Private Equity Into Your Business
5th January 2023
In the modern age of evolving and fast-growing companies, timely access to debt or capital funding can be determinant of whether a market opportunity is won or missed.
The revitalisation of genuine relationship banking in the big banks is welcome, but not all business growth strategies sit within their acceptable risk appetite. This is understandable. Banks don’t participate in the upside of improved enterprise value in a successful business, but if the business fails, they are heavily exposed to the downside of a failing business. Where bank debt financing is unavailable, business owners have the option of scrambling for alternative, potentially expensive, funding or letting growth opportunities pass by. Bringing in a co-investment partner is a genuine option which can be quite rewarding, but also carries potentially significant risks.
The potential benefits to private equity funding are:
- Moving away from mediocrity and making your organisation all it can be while maximising enterprise value and shareholder returns
- Cash for new growth projects
- Exposure to new ideas, new products and new markets with the input of a ‘smart’ money investor
Getting Investment Ready
Assuming the company structure is correct with a clean balance sheet free of major related party transactions, embarking on the private equity path generally starts with getting the pitch right. Owners need to know their business and easily describe what they do, how you do it, and why you do it. The value drivers and growth opportunities need to be clearly articulated, along with being realistic about downside risks and thoughtful mitigants. Owners also need to know their numbers backwards top performing products and services, margins, assets maintenance costs, overheads, capacity and run rate.
Knowing The Investor
Unwinding a private equity arrangement is difficult and often expensive. Business owners need to consider the ‘fit’ in terms of culture and attitude to business and return on investment generally. The co-investor needs to believe in what the owner’s objectives and plans are. People should do business with people they like. Partnering with private equity is far more likely to be successful if the parties enjoy each other’s presence. People tend to do long term business with people they like.
For a private equity injection to work both parties need to agree in advance on business strategy, reinvestment and dividend policies, and the shape and timeline for an exit. A shared understanding of the inputs of the private equity investor is also critical. Will the co-investor inject ‘smart’ money, whereby they contribute proactively to business strategy and even operations? Or is the business owner chasing passive investment monies only? Good fences make good neighbours and having the relationship workings documented in a shareholders’ agreement or similar reduces risks.
Reverse due diligence on the potential private equity partner and their ability to invest and contribute over the long term, and steps for investment readiness shouldn’t be rushed. The arrangement could be a big play, with big risk and also big reward.
“Business owners also need to manage the distraction of preparing for and negotiating the injection of private equity” says Colin Ryan, Partner at PVW. “ It can be difficult trying to cut a deal without making mistakes while maintaining the current run rate of the business. Business owners need to be prepared for the additional time, effort and mental energy that goes into such a project.”
Potential Deal Process
- Assemble the team – key personnel + advisors with relevant experience
- Prepare Pitch Document
- Sign non-disclosure agreement (NDA) with potential investor and release Pitch Document
- Respond carefully to initial due diligence ( questions
- Negotiate key deal terms & construct non-binding term sheet
- Setup a data room and step through second round intensive DD
- Contract construction, updated for DD outcomes
- Finalise legals and execute
When exploring the potential for an injection of private equity into your business, it’s essential to assemble an advisory team with the experience and skills to maximise the new relationship and impact on enterprise value and minimise risks of dispute and value leakage.
PVW Partners has the largest dedicated advisory team in Regional Queensland with a proven track record of helping clients start, grow, or exit their business. They achieve valuable outcomes for their clients as they work through their major milestones and challenges by leveraging the breadth and depth of experience of senior professionals at every step of their client engagements. To learn how our advisory team can assist your business, contact PVW Partners for an obligation free discovery chat with one of our Senior Advisors.