Making Your Business Appealing to a Private Equity Group
Ever thought your business was too small to attract a private equity group (PEG)? Well, you could be mistaken. Many private equity groups are looking for smaller businesses because larger ones are sold or not available.
It is also helpful to understand how a PEG works, and the similarities and differences they have to working with a venture capitalist. They often acquire small business as part of a larger transaction. There are a couple of ways to interact with a PEG and make your business appealing to them. Here are some facts to be aware of.
What a Private Equity Group Does
A private equity group purchases a business typically for one reason: to increase its value within a certain amount of time in order to get a reasonable return on their investment. The end goal is to liquidate at least their assets in the business, what is known as an exit or a liquidity event.
Thus, the PEG is very focused on cashflow and the equity they get from the sale of the business. There are a couple of ways they do this.
- Bringing together a fractured industry. Often a n industry will have several businesses doing tasks that could be much more efficient when merged into a single entity, offering a significant savings on overhead costs.
- Buying a platform business and adding smaller ones to add value. This means that your business could be that platform, or it could be appealing to them as one of the smaller, but related businesses that allow them to add value to their larger investment.
- Investing heavily in growth. If your business is in a growth sector, a PEG can invest heavily in the mechanisms and ways to grow that business to increase cashflow and the overall worth of the business.
Essentially, a PEG usually has a timetable for keeping their investment in a business. This is because instead of a single entity, they are made up of several individuals who are looking for a timely return so that they can move on to other investments.
What a Private Equity Group Looks for in a Business
A private equity firm is therefore looking for a few specific things when they approach a business. If your business has one or more of those things, it may pique their interest.
- Scalable Growth: With the right investment can your business grow and scale quickly over the next five to ten years? Is your primary obstacle to growth a funding issue? A PEG investment may be the answer.
- Related to or Part of an Emerging Technology: Can your product or service combine with another one or even several other ones to spur the further development of an emerging technology? Would yours be a good platform company or would it fit well in a larger industry?
- Cash Flow: One of the sources of revenue for a PEG is cashflow, so this is a big factor in their acquisition strategy.
The other factor is simply that the PEG may want you to continue to operate your business or at least be involved for a certain period of time before you make an exit. Be prepared for this ask, and be sure you understand the terms under which you will be expected to operate.
How to Make Your Business Appealing
So how do you make your business appealing to a Private Equity Group? The first factor is to make sure you have recast your books from the tax-friendly ones they typically are to show your true income and income potential.
The second is to gather data and analytics about your industry to show the potential for growth. Be sure to include how your business might fit in the overall picture of that industry, and how it might pair well with other entities in an efficient way.
The more of the prep work you can present to a PEG, the less time it will take for them to do their due diligence and make you an offer.
Ready to sell your business and think you might be the right fit for acquisition by a Private Equity Group? A business broker can help you make sure and can help you locate a PEG that is interested in your type of business. Contact us today for more information. We are here to help the process of selling your business go as smoothly as possible.
Great article and an area often misunderstood by small business owners.