32 corporate finance
Making your business attractive to private equity houses
Equity finance is a way of raising capital from external investors in return for a share of your business. It‘s a viable option for many businesses with high- growth potential that are looking to raise substantial investment sums which banks or other lenders are unable to provide – so it‘s no surprise that private equity investment is on the rise in the Solent area. Shoosmiths‘ corporate partner Lynn Knight shares her advice on how to make sure private equity investment is right for you, what to expect and how to make your business stand out to potential investors
”Our corporate team at Shoosmiths advises local businesses right through the business life cycle from start up and first round finance through to mergers and acquisitions and/or development funding and on to exit. An exit may be by way of sale, listing or private equity investment,” explains Knight, ”and we have a wealth of experience in advising local companies who are looking for private equity investment.”
One such company was Clearwater Group plc, a leading provider of a range of water treatment services based in Camberley, Surrey. Knight, alongside client partner, Sean Wright, advised the exiting shareholder and the management team of Clearwater on the acquisition by Baird Capital of a majority interest in the Clearwater corporate group – a deal which will take the Clearwater business to the next level in its evolution.
Knight comments: ”This was a great transaction to work on and a sound example of how private equity can really transform your business and drive forward its growth.”
Unlike securing finance from a bank that will charge interest and require regular capital repayment, private equity investors only see their desired return on their investment if your business succeeds. Therefore, they will want to have real involvement in the business to guarantee its success.
”As with any type of investment, there will always be strings attached and those strings
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Lynn Knight
can feel very limiting if you don‘t share the same vision as your backers,” warns Knight. ”Relationships are key to a successful private equity deal. I always advise clients to ask themselves whether they can see themselves working in partnership with the investor before making that jump.”
Private equity houses raise their own funds, invest them in your business and then at the right time sell their equity stake to repay the cash to their own investors. Therefore, they need to see that you have a strong business plan in place and realistic financial projections which demonstrate sustained growth. In addition to your profitability, they will take factors such as your sector, your market position, and key assets into consideration when valuing your business. Private equity investors will have different terms but most will invite their own directors to join your board of directors and will appoint an independent chairman to provide a neutral, objective view on board decisions.
If you still think private equity is for you, then it‘s important to make sure that your business is investment ready so that you can secure the best possible deal, minimise risk and deliver the return on investment that private equity investors are looking for.
• Be realistic – don‘t over or under- estimate your financial projections and carefully consider the amount of capital you need to deliver them
• Understand the market – approach the right investors for your business and your region
• Look beyond the money – consider which investors can offer useful knowledge and experience as well as capital
• Be objective – take a step back and look at where there might be risk for an outside investor – for example, employment terms of your workforce, your property portfolio or share option schemes for staff
• Negotiate your terms – make a clear commercial agreement with the investor on the level of control required by the investor before the legal drafting begins – this can be done using an equity term sheet covering key issues/areas.
• Strengthen your management team – investors need to know that your management team has the talent to lead your business to success. If a key member of current management wants to leave on or shortly after completion of the investment, who will replace them?
• Get the right legal advice – our legal experts advise on all investment terms of private equity deals and actively support management in getting the deal done while running its business at the same time – which is always tough.
Details:
www.shoosmiths.co.uk THE BUSINESS MAGAZINE – SOLENT & SOUTH CENTRAL – JUNE 2015
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