Is Private Equity Right For You?

Posted: Aug 9, 2017
Nigel Barratt

In our view most if not all disposal processes should involve private equity.

There are two principal reasons:

  1. Private equity funds offer a distinctively different set of exit options for shareholders;
  2. There are significant funds available to private equity investors meaning there is intense competition for good quality opportunities.

We have set out below further thoughts on the role private equity could play in your exit.

It's fair to say that many clients instinctive reaction to private equity is cautious if not hostile. There is a general view that private equity investors are only interested in mega deals and that working alongside them will be difficult with a short term focus on aggressive financial management.

In fact there is a vibrant private equity community focused on SME businesses with a range of investment philosophies. Involving private equity will undoubtedly be a significant change for you and your business but fundamentally that change is aimed at growing your business and to reward all shareholders.

An existing owner can either sell out 100% to private equity (generally backing a management team i.e. an MBO) or undertake a partial sale to private equity with an opportunity to participate in further growth. It’s the latter opportunity which often comes as a surprise to clients and can lead to radical rethinks on exit planning.

Your business needs to have some of the following characteristics to appeal to private equity;

  • A track record of growth
  • Strong growth potential
  • Have an established and repeatable formula for growth
  • A committed management team
  • Be operating in growth markets
  • Have good cash flow
  • Have secured revenues or strong levels of repeat business
  • A clear business plan
  • An ability to consolidate a market with acquisitions
  • Great systems
  • Good corporate governance
  • Have an obvious buyer or buyers at a future date

Few businesses have all of these characteristics but a private equity investor will need to build on some of these foundations. Private equity investors in the SME space have to be able to add significant value beyond money. They are likely to have sector experience, access to talented non executives together with experience of building businesses.

Ultimately all private equity investors are looking to generate a capital return from their investment. A typical investment period is 3 to 5 years although some investors will look at longer time frames. As a guide, a private equity investor will look to generate a total return of 2-3 times their investment.

If you are looking to exit your business, 100% a private equity investor may be a buyer especially if you can put together an MBO. However, a private equity investor also offers you an opportunity to participate in the future growth of your business. In doing so you can continue to be actively involved as an executive or reduce your role to a non-executive. Your willingness to re-invest will have a very positive impact on attitude to the transaction.

Inevitably, your ability to reduce involvement will depend on whether you have already brought in senior management. If you haven’t you will need to work alongside an investor to create that team. We find that clients who decide to explore a sale having become jaded can be enthused by the opportunity to work with a new partner having taken a cash sum from a partial sale.

The receipt of cash can also lead to a re-appraisal of risk-we often find that increasing success can ultimately create risk aversion as holding on to what you have stops risk taking. Importantly we would not expect valuations to be substantially different from potential trade buyers. For your company the process may result in additional funds for more aggressive development of your business.

Our commitment to clients is to provide solutions. We will analyse your business to assess whether or not private equity investors would have an interest. If there is going to be interest, we can assist you to maximise the opportunity and find you the right partner.

Completing a private equity transaction is complex, the industry has a language and style of its own and preparation is key. Clients are at first surprised and then daunted by the level of due diligence undertaken by investors - we help reduce the task and make sure you will get through it. Initially we will recommend that you have informal meetings with potential investors so that you can better understand the different approaches.


HURST advise on UDP & Foresight deal HURST advise on Hartley Botanic & Rockpool Investments Deal HURST advise on Harman Technology & Pemberstone Deal HURST advise on CES UK & HG Capital Deal

 We have significant experience of concluding private equity transactions and we understand the requirements of many potential investors. Call 0161 832 6633 or email to find out more