A private equity firm offers investment in return for a controlling stake, to help you in the next stage of your growth.
While giving up control of your business might sound scary, private equity could be a good option if you, as founder:
- need funding and expertise to take your business to the next stage of its growth
- feel you've taken the business as far as you can
- want to retire
A private equity firm will take a large or controlling stake in your business. In return, the business receives cash and an expert steer to help it grow, while your previous shareholders may receive a cash settlement.
You (the seller)
The current shareholders of the company who want to sell.
Private equity investors (the buyers)
They keep an eye on the market and approach businesses that suit their investment strategy.
Intermediaries, such as investment banks, corporate finance advisers and boutique advisers. They help the private equity investors complete due diligence on your company, shareholders and other key areas the investors have specified.
Intermediaries who help you present your company for sale to investors in a professional manner.
You, and the private equity investors, will each hire lawyers to check the sale/purchase is properly and correctly documented.
Private equity often triggers a change of ownership. Debt providers will help the private equity investors to buy their stake in the business and any existing debt. This is called a leveraged buy-out.
Your business might be able to tens of millions of pounds to finance its growth.
Investors use their expertise to support the company’s growth strategy. Their motivation for doing this comes from the opportunity to increase the value of their shareholding.
Private equity funds aim to implement a strategy from day one to make a business more attractive to buyers. Typically this can be over a five-year timeline.
Usually, you, as business owner, will be dealing with a team of two to five investors, making the process more personal.
Few guarantees of growth
You're giving away a significant share in your business in return for finance. There's no guarantee that your business will grow and succeed as a result.
Private equity investors typically look to sell their shares within five years.
About your business
- Business stage: Mature and growing; profitable
- Annual turnover: £10m–£100m
- Sectors: All
- Regions: All
About the finance
- Purpose of finance: Change in shareholder ownership, management buy-outs, acquisition, product development, entry into new markets
- Amount available: £10m–£50m
- Duration of finance: 3–5 years
- Cost of finance: Monitoring and director fees; loan note interest
- Time it can take to get finance: 3 months–1 year
Ask an expert: Tim Hames, director general at the British Private Equity and Venture Capital Association (BVCA)
Private equity firms look for a place they can make a return. If I had to offer businesses three tips, they would be the following:
Tip 1: It’s more of a sin to ask for too little money than it is to ask for too much
If you end up going back and asking for more, it looks unprofessional. Pitch high in the first place and the firm can always scale you back.
Tip 2: Find a partner that brings you more than money
Look for sector knowledge or expertise that your board members don’t already have. Sector knowledge will bring contacts and networks, while experts will be able to pre-empt issues concerning personnel and expansion.
Tip 3: Save time by understanding the difference between institutions before you speak to them
Understand how your business matches up to the person you’re speaking to. Make sure you understand what they’re looking for.
Giving up part of the business
Private equity investors often demand a controlling stake.
Investors will expect board seats and even their choice of chairperson.
Private equity is not a long-term source of funding. Firms will often sell their shares after the investment period (usually within five years) is over.
You must be willing to make changes to your strategy, operations and management.
Intermediaries such as lawyers, investment banks or advisers might approach you. Sometimes, private equity firms go to the business directly. You can also approach firms yourself too.
Seek independent finance advice from your accountant or financial adviser, or speak with other intermediaries.
The process can take up to a year.
“You build relationships in private equity over three or four years. So, if you’re thinking of retiring and there’s no obvious succession plan, private equity can make your exit easier.”
Other finance options
|Purpose of financessss||Acquisition; research and development|
|Amount of finance||£1m+, depending on funding round|
|Duration of finance||5-10 years|
|Cost of finance||None|
|Time of finance||6-12 months|
|Business stage||Early stage; no revenue or profit needed|
|Annual turnover||Depends on the business, but is often below £3m|
|Purpose of financessss||Creating new products, acquisition finance, product development, project fulfilment, entry into new markets|
|Amount of finance||Up to £4.3m without a prospectus, higher with a prospectus|
|Duration of finance||Dependent on the business being funded|
|Cost of finance||This is platform specific. Platforms often charge a success fee (usually a percentage of the amount raised) with a listing fee. Others will charge a percentage of profit|
|Time of finance||Once your documents are in order, it can take as little as a month|
|Business stage||Pre-revenue through to more established businesses|
|Purpose of financessss||Acquisition, product development, new markets|
|Amount of finance||Up to £50m on AIM; unlimited on the Main Market|
|Duration of finance||10 years +|
|Cost of finance||You will need to appoint an accountant, a law firm and usually a PR firm. Assume this will cost 8% of the amount you hope to raise|
|Time of finance||IPO processes takes 10-12 weeks; but planning and negotiations can take 12-18 months|
|Business stage||Established and growing|
|Annual turnover||Over £5m; this does not apply to healthcare businesses|
|Sectors||All sectors; healthcare and tech may be able to list earlier in their lifecycle than other sectors|
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