Will a PE Firm Want to Work with You?May 16, 2017
Private equity investors will scrutinize several things about your business before investing — especially its cash flow. Learn how you can secure this alternative funding option.
Companies in search of alternative funding options may decide to sell all (or part) of their operations to a private equity (PE) firm. But your company might not necessarily have what it takes to attract PE investors. Although every PE firm has its own strategy, here are four leading factors that investors weigh when deciding whether to get involved with a business.
- Cash Flow - The most important factor? Probably cash flow. Because most PE investors use a combination of debt and equity to fund investments, they generally prefer businesses that produce stable, sustainable streams of cash flow. A company with a history of generating solid EBITDA (earnings before interest, taxes, depreciation and amortization) shows investors how they’ll be able to service their debt obligations and satisfy liquidity covenants with lenders.
- Management Team Strength - Many PE firms want to be investors, not operators. So, they’re likely to leave the existing management team in place when they buy into a company and hire additional resources as needed. Your chances of attracting PE increase if the current management team is equipped to execute the company’s growth strategies. It’s important to demonstrate that your leaders have significant experience and a proven track record.
- Growth Prospects - PE firms demand high growth and a relatively quick return on their investments. Many look for companies with a balanced strategy — for example, expanding products and geographic markets, while also cross-selling — that aren’t overly dependent on a single driver of growth. Investors also look for favorable industry trends, such as automation or digitization. Companies in industries undergoing transformation (such as health care or transportation) can offer promising growth prospects, too, assuming they’re on the right side of the change.
- Potential for Value Creation - PE firms look for opportunities to add value. Would your company benefit from synergies with a firm’s current portfolio of companies? For example, you may be able to achieve efficiencies by sharing resources or optimize pricing by getting better deals with suppliers that are part of the PE firm’s portfolio.
How Do You Measure Up?
You don’t need to score perfectly in all four areas to be a solid candidate for this type of financing. PE firms have specialists who can help companies find creative solutions in a pinch. For example, they might be willing to invest in a troubled company in exchange for more control, a lower price and a higher return. In turn, the extra cash, operating synergies and expertise may be just what’s needed to turn the business around.
Facing risks and uncertainty is part of any business. It’s important to consider where your company currently stands and how it can position itself to bring in more commitments and investors for 2017 and beyond if that’s an option you are looking to explore. Got questions? Contact us.