Private business growth through private equity investment: Five steps to get it right
August 2022
Private family businesses expect to accomplish their growth goals over the next two years by venturing into new markets, introducing new products and pursuing M&A opportunities, according to the PwC US NextGen Survey 2022.
The way forward: private equity (PE) investments, long viewed as catalysts of growth and innovation. And there are record levels of “dry powder”—low-risk, highly liquid cash or marketable securities—in the market, with US private equity totals at $975 billion according to the US Deals 2024 midyear Outlook.
Is a PE fund right for you?
For founding and next generation owners who want their business to grow through outside capital, or for those who may not want to continue in sole ownership, it’s essential to ask the right questions before closing a deal. That holds true whether you’re selling a minority stake and retaining control or selling a majority stake and maintaining a smaller degree of involvement.
It’s essential to do your due diligence. Take into consideration volatility and the possibility of regulatory action. Ask for references and examine any potential investor’s track record. You can improve your ability to accomplish your goals by keeping in mind the following considerations:
1. Be clear on your goals.
Thoroughly evaluate your organization’s needs and determine your objectives and priorities. Consider personal as well as business concerns. Make sure that the investor you choose has significant experience in your industry and ancillary industries, including expertise in your products or services. Make sure the investor intends to align with your organization’s capabilities, values and plans. That includes sharing the same philosophy on business growth—will it be through inorganic (acquisitions, new locations) or organic means?
One multi-generational family business failed to ensure that members of the family shareholder group agreed on key issues before negotiations began. An activist family shareholder made disparaging comments to the press, and deal value suffered as a consequence.
2. Evaluate a potential investor’s management approach.
Determine how active the investor will be in day-to-day operations and decisions. A PE partner could bring more pressure on reporting transparency and technology adoption. We’ve found that 71% of portfolio companies discuss scenario plans with their PE firms at least quarterly. A new investor, looking to optimize cash flow, may take a more aggressive approach on collections, terms and prices with suppliers and vendors. The PE partner could sell underutilized or nonstrategic assets—potentially a shock for an owner.
PE firms recognize that portfolio company data monitoring is inconsistent. More than half (54%) of portcos still rely on an old-school approach, using email to collect data and respond to requests. More than one-third (36%) simply respond with emails. Expect more focus on data transformation strategies at portcos in the next five years.
Source: PwC's Next in private equity report.
3. Focus on the value you seek in terms of growing and expanding the business.
Partner with a firm that is positioned to bring the right skills and talent—professional management guidance, accounting expertise, sales and marketing know-how, and talent and technology acumen—as well as one with a portfolio operating model that aligns with your needs. Gain an understanding of private equity’s playbook for creating investment value.
When considering a PE deal, a family business owner typically wants to see robust returns in the “second bite of the apple” with their rollover equity. The PE ownership structure can also help management share in the potential increase in value, post-deal through options and restricted share grants, which can help create retention and reward options for those in key management roles.
4. Define your values and protect your brand reputation.
Many family businesses take a personal approach with stakeholders and often have a strong focus on community involvement. If your family’s name continues to be associated with the company, make sure that the PE firm supports your vision for your family’s narrative.
One client nearly closed a deal with an investor whose values weren’t in sync with those of the family business and decided to back out of the arrangement. The family business looked for a different PE firm and ultimately chose to give up value in order to partner with a firm more aligned with its well-established brand.
5. Clarify the type of fund that your PE partner will use to invest in your business.
Some firms are now turning to funds with extended-length horizons to better fit the needs of family businesses. That’s instead of funds with horizons of as little as three to five years, which could create challenging issues with PE firms when they begin to approach the third or fourth years, and may feel pressured to drive up returns.
Although exiting their equity interest in the business they founded, an owner family generally will have a vested interest in seeing their organization continue to thrive. The structure of the fund’s duration will affect the behaviors of the new owners and consequently their ability to grow the business over the long term.
Bottom line
With so much PE dry powder in the market, private companies have attractive options for funding partners. Before moving ahead, be sure that you know your potential PE buyer’s track record and have a thorough understanding of their plans for your organization. The better you know your company’s strengths, weaknesses and goals, and those of your investor, the more likely you are to find a partner that aligns with your vision for your company’s growth. Ready to prepare for a sale? Review the steps in our private company exit guide.
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