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 welcomed, 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.
Getting Investment Ready
Assuming the company structure is correct witha 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 they do it, and why they 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.
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 document reduces risks.
No Shortcuts
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.”
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.
Read PVW’s recent online article – Driving Engagement through Conversation.
