Are you ready for Private Equity investment?

When a PE deal process fails it is very frustrating for both management and the prospective investor. In most cases, both parties have expended significant amounts of time and effort. There are many and varied reasons why a deal can fall through, but one that is consistently cited by investors is that a business was not “ready” for investment.

So what does being “investor ready” actually mean? How can you make your business investor ready? You need to ask yourself a series of simple questions and your honest answers will tell you how investor-ready you are.

1. Is your management team strong?

Your management team must have depth and breadth. An investor will be nervous if a business is dominated by or is too reliant on one individual who clearly directs and controls other members of the senior team. A business must have a leader but others must contribute and be effective across the main functional areas such as operations, sales and finance. The COVID-19 Pandemic has resulted in another angle of questioning from investors. Investors will want to understand how the management team has dealt with the disruption which has impacted many markets. It will not reflect well on the team if the strategy is one of “more of the same” in the hope of coming out the other side.

Investors will react well to the team taking the opportunity to reset strategy to adopt to the changes that will inevitably result. A good example of this is accelerating the adoption of technology to improve internal efficiency and/or enhance the customer experience. However, a PE investor will not be put off by the need to fill some gaps in the management team. A PE House will often be able to add value by attracting the right quality executives to the business.

2. Are you clear on your key strategic priorities?

Your strategic priorities must have a material impact on the growth of your business and therefore value such geographic expansion, product extension or making acquisitions. They cannot be a tactical “to-do list”. It is always worth remembering that too many strategic priorities can almost be as bad as too few or none at all! It will be enormously attractive to an investor that you have thought through and agreed a list of meaningful strategic priorities ahead of any investment. It will give the investor confidence that you are focused on growth and are ready for investment.

3. Do you have quality data to support quality decision making?

Potential investors will be nervous if your decision-making process in the business is largely intuitive or made without reference to data or evidence. Regular, timely and accurate management information means that the management team are able to make the right decisions to drive growth. Key performance indicators covering operations, sales, finance and other functional areas will drive better decisions.

4. Does your management teamwork “on” aswell as “in” the business?

Do you regularly create time for the leadership team to discuss the business’s overall direction of travel and its strategic progress? In many growth businesses with limited resources, the leadership team fail to find time and space to step back from the day-to-day challenges of running the business. An investor will not expect you to be holding monthly board meetings, this practice can be developed post-investment, but the discipline of devoting time to your strategic direction and priorities will be well received.

5. Do you have medium-term financial forecasts?

Not many privately owned high-growth businesses have medium-term financial forecasts. But PE investors usually have a 3-5 year time horizon for holding an investment. A medium-term financial plan will underpin their investment and the shape of any future returns.

Medium-term forecasts cannot just be based on a top-down view. For example, “Sales will grow at 20% per annum” is not a solid forecast. There should also be a bottom-up analysis with carefully considered assumptions around the level of overhead investment required to support top-line growth.

6. Do you really know your customer?

This may appear to be an odd question, as most businesses will claim that they know their customers very well. A key characteristic of successful businesses is customer insight. Do you know precisely what services are used, how much profit is made from each customer, the cost of acquiring new customers and the potential for selling other services? The more you understand your customers and how they use your products or services, the better you will be at retaining and winning business.

If you can answer “Yes” to the questions above you are on your way to being ‘investor ready’ and a more attractive proposition for potential investors. Finally, even if you don’t go for or get PE investment, your business will be more effective and profitable if you can answer yes to those key questions.