Getting your business ready for Private Equity backing

By Daniel Martin, Senior Director at Shawbrook

Despite the recent drop in inflation and bank rates, businesses are currently faced with the long-tail effects of high input costs from last year, as well as the challenges of managing disrupted supply chains, staffing shortages and the cost of technology upgrades. It’s a juggling act, yet for many SMEs I’m talking to it is also a time for growth – be it via acquisitions, sponsor investment, or expanding into new markets.

For Private Equity houses, last year’s challenges and uncertainty meant that sponsors were cautious and selective with their portfolio investments. Some sectors like wealth management and technology kept consistency with a fair amount of new sponsor acquisitions funded by our teams.

We also saw a lot of activity in the low end of the market buoyed by Search Fund acquisitions. What we’re now seeing is an increased sense of optimism in the broader sponsor markets, bringing with it a possible uplift in new investments across multiple sectors.

For SMEs focused on accelerating growth, private equity backing is one of the common routes considered although this requires preparation. So what do SMEs need to do to get their businesses ready for this stage of their journey?

Heart of the business

Your management team sits at the heart of the business and it is fundamental to have a balanced team that has in-depth knowledge of the company and its strengths and weaknesses and is ultimately on the same page regarding future objectives. This ensures the business is uniform in its strategy and usually leads to a well-integrated and well-informed employee base. 

It is also critical when you need to identify efficiencies and move quickly on new opportunities. 

Information at your fingertips

The quality of your financial information and the state of your data reporting is another key element. SMEs need to be able to forecast expected revenue and expenses as well as evaluating different scenarios based on market developments, current consumer or client behaviour etc. In principle, these scenarios help determine timings for larger changes, support successful planning and agile decisions and reflect the stability of the enterprise to both sponsors considering investing and external stakeholders.

Take the best advice

I often find that the right advisory firm can help consolidate the business and speed up progress when discussing external funding. It is worth considering whether the advisory group is a good cultural fit for both your management team and the sponsor, whether the firm has sector knowledge and is experienced in the transition you are planning. For example, selecting an advisory group that knows the sponsor’s business ethos and financial return expectations can boost the right interest from the Private Equity market. Alongside this, working with an advisor that understands your business can result in a more accurate and sometimes increased sale valuation and impact on the partnership with the sponsor in the end.

Know your lender

Any lender working with a client for the first time will look to complete a due diligence assessment which naturally factors the current strength of the business alongside its forecasting. I would say that it is also important for you to complete a funder assessment and determine if the lender has a solid structure that caters for your future development. And, I’d recommend getting under the skin of the lender to ensure their ethos aligns. Ideally you want a strong long-term relationship with a funder that will ride the waves with you, during easy and tough times.

Taking your business to its next stage requires planning, and the right building blocks. From a well-informed crew and the technology that delivers the insights required to a well-aligned advisory firm and an established funder, these building blocks are critical to secure investment and grow your business.

To find out more about our private equity facilities and how you can get your business ready for this critical stage, visit our website here and come and meet us at the Rainmaker Conference.