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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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Selling a Privately Owned Business – Briefing 18 – Selling to a Financial Buyer


In this next in our current series of blogs about different types of buyer, we look at “financial buyers”, which in the small business market generally means Private Equity firms, or potentially Individual Investors.

Private Equity is essentially capital that is not noted on a public exchange, and is usually comprised of funds and investors that directly invest in private companies for a variety of investment objectives, principally to facilitate growth and value.  Private Equity firms generally buy 100% or almost always the majority stake in a business thus remaining in full control of the business.

Set out below are some key points relevant to you in considering selling to a Private Equity buyer.

  • Private Equity firms need to deliver capital gain to their investors, and look for healthy returns as a reward for the (theoretical) higher risk in their transactions.
  • The return on the Private Equity investment is measured through an internal rate of return (IRR) which would generally be around or in excess of some 30% on the capital invested.
  • Generally speaking, a Private Equity investment is a shorter-term timescale rather than a longer-term and typically this would be around 3 – 5 years before subsequent exit.  However, some firms do specialise in longer-term investments.
  • For a successful Private Equity sale, the business must have a strong credible growth story and future plans must be robust and substantiable.
  • An absolutely key element is building a strong management team which can demonstrate the ability (and real desire) to take the business forward.  Fundamentally, the Private Equity buyer is backing the management team, more so even than the business itself. A good business and growth potential will not succeed with weak management, whereas good management can turn around a weak business.
  • It is also necessary to properly demonstrate that the business can continue and genuinely progress without you as the outgoing owner.

When selling to a Private Equity buyer, more than for other circumstances a strong, clear business plan must be in place, demonstrating the business’ key strengths, its differentiation from competition, a known or clearly identified pipeline of potential new business and how future growth can be achieved.

  • A sale to Private Equity will require a close partnership between the ongoing management and the Private Equity firm for the duration of the investment, and a clear exit path will need to be identified right from the outset, with a clear plan for achieving that exit agreed and in place.

As can be seen from the above points, Private Equity buyers are somewhat specialist and not every business will be suitable.  Hard work, dedication and a clear business strategy will all be required to achieve the growth and return required for Private Equity investors, but the rewards can equally be substantial.  Specialist professional help from the outset will assist greatly in achieving a successful Private Equity sale.

Posted on by Mike Halls

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