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
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
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
23 December 2019