Skip to main content

Bringing in the Outsider: Are You Ready For Private Equity?

For a long time now, Private Equity (PE) has been seen as the easiest solution to financing needs. At each stage of business growth, funding needs can be met by simply giving an agreeable stake in your business to someone who brings money (and a lot more) to the table. However, like most things, there is nothing simple about the process.

The key question that puts the process in perspective is: Are you really ready for an outsider to be a part of what has been just yours – to have them in your meetings, involve them in strategy, and get clearances from them and to use their inputs for fruitful organizational change.

The above may sound overwhelming, but remember – a PE investor brings in lot more than just money.

PE capital though expensive, is ‘smart money’ and PE firms, despite being typically minority shareholders, meaningfully contribute towards the growth and success of their investee companies. Success of these investments is dependent on the success of the venture/business.

The investors ensure that the entrepreneurs are helped with all resources and learning which can be mustered by the fund.  The investors also enable entrepreneurs to achieve success that may have otherwise been beyond reach by providing value enhancement over and above money. For example, improvements in corporate governance, strategic direction, board advisers  access to network of partners and customers, additional capital - equity and debt, etc.

The starting point of the process is to understand your own business, objectives and motives for the investment. There are some basic perspectives to be kept in mind:
  • Understand your own stage of business – expansion is the ideal phase to consider an investor
  • Align your business structure in-line with your core objectives – and how you want to grow your business
  • If a diversified approach is preferred from an operational as well as financial perspective, investments in the existing company may be advisable
  • If a particular SBU is stronger in its own capacity in terms of financial contribution as well as growth, creating an SPV could be a suitable route
  • Understand what PE investors look for and identify the investment point that is more acceptable to their overall criteria and objectives

Once your business objectives and funding objectives are aligned, prepare your organization internally for the change. This usually means some very basic yet essential steps:
  • Take stock of operational procedures that need to be aligned and streamlined
  • Prepare your employees for an organizational restructuring which could come as a result of an investment decision
  • Ensure that all financial reporting systems are in place and that your firm is due-diligence friendly
    • Consider appointing a reputable audit firm
    • Clean-up related party transactions
    • Ensure adequate documentation supporting the books of accounts
    • Consider investing in good MIS or ERP systems to produce accurate data during discussions and post funding
    • Clean-up tax matters if applicable
  • Restructure the company, if required, to facilitate investment in a subsidiary or SPV
  • Have a robust business plan and strategy in place and ensure granularity in projections as well as linkage to historical performance
  • Get a formal valuation done which can be  defended based on your business plan

Ultimately, you are bringing in an outsider which usually means you are migrating from a family run establishment to greater professionalism. It also means that through the process, interests, expectations and control needs of various family members and/or co-owners has to be managed very delicately.

Most importantly, remember to keep your own objectives and plans as the primary factor irrespective of the PE acceptability. Your business was your idea, you need to be open to new opinions and change for growth but, not if you completely alter the core of your business. If you are willing to do that, an outright sale may be a better way forward.

Comments

Popular posts from this blog

Big pictures, Small details, – The Nuts And Bolts Of Valuing A New Set Up

When you study accounts, you are taught to pay attention to every tiny detail. Every bit of finished goods needs to be derived from raw materials, work in progress and the reach its current state. Every invoice and value has to tally up. All the small things somehow have a multiplier effect on the balance sheet and errors show up if things are missed. Unlearning this habit when developing a valuation assessment for a set-up, is not an easy process – but a necessary one. I am not saying in any way that misrepresentation is required, simply that generic assumptions, and missing some tiny details when creating a financial model for valuation/investment purposes is perhaps more prudent and quick. Because really, for valuation, the multiplier effects of the smaller things are really minimal. The question to ask when dwelling on a small issue is – is this going to materially impact the value of the company. This is especially true for newer set ups where all the smaller elements are not

Lets’ Start the Conversation - Planning Your Future

  A while ago, I was pulled into a discussion on women’s equality and how to bridge the gap. To me it begins with changing the way we interact in an often evidently patriarchal world. These were my main questions: how many women (working or not) consider the male member of the house as the primary provider? How many women ask the kids to not disturb dad because he has had a long day at work? And how many women leave all the financial decisions of life to their partner to make? In my various discussions, it seems like a lot of women seem to be surprisingly willing to take a back seat in the financial planning. There are various reasons ranging from “its not my area of expertise”, to “its not me who is earning” and some who just “have not got down to it”. Of course, most of these women do think about financial planning but in an environment like Bahrain, avenues and information on options is limited, often individual income of women is limited and, let’s face it, retirement seems to

An Idea, a Plan, a Spirit: Your Start-Up Ticks Like You Do

Legally, your organization and you are recognized as separate individuals. But beyond legality, the lines are more often than not very blurred. This is especially true for start-ups and the entrepreneurs with big dreams and ideas. How often have you, as an entrepreneur, found yourself funding that one marketing expense out of your own pocket? That land your factory needs can be your own asset - then the money is all with you right? Wrong – in reality, if a business has to be run like a business it has to be separate from you – so if your business owes you something, it owes you – you cannot write it off saying it’s all mine. Again - that’s the legal stand point. Reality: You are one with your business, so embrace the concept in spirit. The idea for the venture usually is a big dream. And a dream has a fundamental premise. You, as the dreamer, have a certain ideology backing up that dream. The details of the implementation plan will include how you want to fundamentally do busi