Private Equity (PE) analysts predict activity and performance in 2021 to surpass the $316.9 billion set in 2020. The outlook looks promising and will surpass $330 billion setting an all-time high. If you are considering seeking private equity to take your company to the next level, the potential certainly exists. But is your company private equity ready?
PE investors will scrutinize your financials and perform extensive due diligence to determine whether your company is investment worthy. In addition, due to the current state of uncertainty due to the pandemic, they will be particularly thorough in their analysis. Before starting the process of raising capital, you need to be fully prepared. Vinnie Tuzzio, CFO for C-Suite Impact CFOs, says that “the best thing you can do is to be proactive. Start your preparation and planning process early, not when you are ready to make a deal.”
What Is Private Equity?
Let’s first discuss what private equity actually is. You may have heard the term, but are not familiar with how it works. Private equity is capital that is invested in non-publicly traded companies. The investors are high net worth individuals or firms. Some PE firms are passive investors, meaning they provide funding only, but many are active investors and take a proactive role in the management and strategy of the companies they invest in. They can be a great asset to privately held companies in this function, as well as being a source of significant capital to fuel the growth of a company.
Is Private Equity Right for You?
First, you need to consider whether private equity is the right avenue of growth for your company. While a private equity investment can help you to achieve your growth goals, there are some things to consider:
- You will lose some ownership, perhaps even a majority, although you can always walk away from a deal that requires that you give up a majority.
- You may lose control. The private equity investor may want to take over much of the management of your company.
- The private equity firm may value your company differently than you do. They will be interested in the financial value only as of a specific date when they want to sell their stake in the company.
- You will be subject to much more oversight, even if you retain management control. The investor may require a much higher level of financial reporting which will require a higher level of financial management.
However, on the positive side you will get significant funding for your growth strategy as well as the active involvement of the PE firm in managing and implementing your strategies.
According to a Deloitte Insights article “Since the pandemic hit in early 2020, many PE firms have stepped up to support their portfolio companies in myriad ways. Portfolio companies—especially smaller ones—seem to appreciate PE’s management input and industry connections as much as the capital they provide.”
The bottom line is that you will be able to take your company to a level that you probably could not without funding. It is important, though, that all stakeholders in your company are on board with seeking private equity.
Is Your Company Financially Healthy?
The health of your company is not just about sales, and private equity investors know this. A healthy business is running efficiently, maximizing its potential at any given stage. There is little wasted time and money, cash flow is sufficient to support operations, systems run smoothly, and your team works well together.
If there are issues with your efficiency, as you grow the inefficiencies will become larger problems. It’s critical to work with a financial professional to review all aspects of your company to make sure that cash flow is being managed effectively, and that all the processes and functions of your company are running at maximum efficiency. There are three key areas to focus on:
- Your KPIs – Are you measuring the right KPIs, and are they being managed properly?
- Is your internal cash flow being maximized?
- Are you minimizing your risk?
Again, work with a financial professional to analyze these areas and correct any issues.
Have All Your Financials in Order
Carlos Ferreira, national managing partner of private equity at Grant Thornton US says, “private equity investors are going to seek a considerable amount of information. The majority of it financial, but they’ll also want to know what the customers look like and what the supply chain looks like; what intellectual property and facilities the business has. The starting point is having good financial information, good financial records and detailed information.”
The due diligence process that you will face when seeking private equity is rigorous, and you will need to have all your financial records and other information prepared at a level of detail that you may not currently have. They will not only want to see this kind of detail, but also know that you have the capacity to report in the same kind of detail on a regular basis.
Have the Right Team On Board
The investors will look closely at your management team, including your external team of advisors. You need to examine your internal team to make sure that you have the right people who will be able to work with the investors throughout the PE process, and fill any management gaps that you may have.
Your external team also needs to be robust and prepared to help you through the process. You need an attorney with experience in private equity deals, as well as an accountant that understands the nuts and bolts of private equity. If you don’t have a CFO, an externally outsourced CFO with the right experience will be an invaluable asset to your company in terms of preparing for the capital raise, working with you throughout the deal process, and managing the financial scrutiny that you will face post-financing.
Build Your Strategic Growth Plan
One of the most important things to have is the answer to the question “what are you going to do with the cash?”. The answer needs to come in the form of a detailed, comprehensive strategic plan for growth.
Will your growth come by increased marketing and sales, or by targeting a new market niche? Do you plan to expand your product offerings? Open new locations? One way or another, your goal is to increase revenue. You need to detail how you are going to achieve that and how much it will cost.
Then you need to plan how you will manage that growth. Will you need more sales people? More customer support? Will your operations need to expand? Will you need to increase your manufacturing capacity? Do you need more space? Everything that you need to support your increased revenue needs to be planned in terms of time and cost.
Post Funding Support
Once you forge through the process and close the deal, your journey does not end. Your company will be the subject of much scrutiny by the investor. You will probably have to provide financial reporting that is more detailed, and more frequent.
Your finance team, both internal and external, needs to be prepared to handle this function. You may have to track KPIs that you have not tracked before based on what the investor defines your key numbers to be. This kind of reporting requires specialized skills and experience. It is not typically a job for an accountant or a financial controller. An experienced CFO can be your most valuable asset after receiving a private equity investment, as well as during your preparation process and pre-funding due diligence.
C-Suite CFOs Can Guide Your Private Equity Preparation
At C-Suite, our CFOs have a broad range of knowledge, skills, and industry experience and can help you to prepare your company to raise capital so that you can achieve your growth goals. We can become a trusted partner to you and provide ongoing guidance and support throughout your private equity journey and beyond, and at a much lower cost than that of a full time CFO. We also have a host of other resources in our portfolio that are available to you from growth to exit. Contact us today to learn more.