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Business Sales : Mergers & Acquisitions : Corporate Consultancy

Beer Mergers Limited is an independent, specialist corporate advisory firm, a "boutique" operation focusing specifically on sales and acquisitions in the small business sector.

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A Brief Guide to Private Equity


Continuing our quick look at various fundraising topics for SME’s, here is a quick guide to Private Equity Funding.

The UK has a highly developed Private Equity market with more businesses funded in the UK than any other European country. So, what are the key considerations for attracting Private Equity?

• Private Equity firms need to deliver capital gain to their investors. They do so by finding and backing good management teams with a commensurate desire and ability to own and succeed in their own business. The PE firm can make significant returns, while management can share in potentially substantial rewards from their efforts.

• Typically, Private Equity investors aim to double or treble their money over a three to four-year period, usually through on-selling or floating the business.

• Fundamentally therefore Private Equity firms seek companies with clear growth potential, and will generally provide funding for:

  • “Cash out” deals – owner-managers sell a proportion of their shares, allowing them to realise cash while retaining a stake in the future success of the company.
  • Management Buy Outs (MBO) – the existing management team acquires the business from its present owners and becomes a shareholder alongside the Private Equity funder.
  • Management Buy In (MBI) – an external management team with a proven track record acquires the business and becomes a shareholder with the Private Equity funder.
  • Buy In Management Buy Out (BIMBO) – a hybrid of a MBO and a MBI, where the business is acquired by a team consisting of incumbent and incoming external managers.
  • Acquisition Capital – investing funds in a business to assist an acquisition.

• As with any investment with significant potential return, there is also risk, and some investments fail, with managers and investors alike losing their money. There are many factors affecting successful Private Equity backing, but there are three absolutely vital elements on all deals:

  • A high-quality management team which has vision, drive and experience to deliver the necessary growth. Private Equity firms back people, not businesses alone.
  • A good quality business which has clear differentiation from its competitors and which operates in an attractive market with good growth potential.
  • A clear exit path identified right from the outset and a clear plan for achieving that exit.

Hard work, dedication and a clear business strategy are all required to achieve the growth and return required for Private Equity investors. Knowledge and understanding of the business and the sector are essential, but above all Private Equity firms are backing the management.

Posted on by Mike Halls

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