Private equity investment – is it right to sell a stake in your business?

If you are a business owner and are approached to sell a stake in your business, or are looking for investors to help fund the next cycle of growth, what do you need to know to make the most informed decision? 

Private Equity firms are investing in many different sectors and each firm will be looking for something different, so choosing the right partner from the beginning is important.

Firms will want to invest in a business to increase its growth with the view to exiting and making a profit on their investment, once it achieves peak value.  This is traditionally something which is aimed for over a short period of time, usually 3-5 years, although the length differs according to the sector.

In exchange for the investment, the private equity firm will usually take an active, day to day role in the management of the business, to refine and oversee plans for growth.  For the business owner, this means your business will benefit from a range of experience and fresh thinking.

Reduced control over day-to-day decision making is, however, one of the hardest areas for owner-managed businesses to accept and you may find you disagree with decisions being made and imposed upon you.  How long you stay with the business will be part of the investment deal, along with measures to keep other key members of your management team in place.

The investment may involve a ‘rollover’ proposal which requires the owners/managers of the business to put aside some of the sale proceeds for reinvestment into a new entity, often a limited company, which then acquires the business.  This allows all parties to have a share in the future increase in value of the business, helping to tie in key personnel, and it also spreads the risk if there is a decrease in value.

Financial details such as the cost of management fees, which the private equity firm will charge, need to be scrutinised, as this could have a big impact on the profitability of the business and its ability to achieve the financial covenants in the investment agreement.  Failure to meet financial covenants could see the private equity firm take full control of the business, so understanding all of the legal obligations and the implications of the deal are essential.

Private equity investment has helped many businesses to accelerate growth plans and to build a strong and successful future and if you are interested in finding out how such a deal could work for you, get in touch.

Sarah Astley can be contacted at s.astley@gullands.com