Private equity

A private equity firm offers investment in return for a controlling stake, to help you in the next stage of your growth.

What is private equity? +

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.

Who's involved? +

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.

Buy-side advisers

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.

Sell-side advisers

Intermediaries who help you present your company for sale to investors in a professional manner.

Lawyers

You, and the private equity investors, will each hire lawyers to check the sale/purchase is properly and correctly documented.

Debt providers

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.

What are the benefits? +

Large investments

Your business might be able to tens of millions of pounds to finance its growth.

Professional help

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.

Exit strategy

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.

Personal process

Usually, you, as business owner, will be dealing with a team of two to five investors, making the process more personal.

What are the risks? +

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.

Quick exit

Private equity investors typically look to sell their shares within five years.

Is it right for me? +

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

How do I choose the right deal? +

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.

What do I need to consider? +

Giving up part of the business

Private equity investors often demand a controlling stake.

Controlling interests

Investors will expect board seats and even their choice of chairperson.

Medium-term solution

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.

Wide-ranging change

You must be willing to make changes to your strategy, operations and management.

How do I get it? +

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.”

Quote logo Tim Hames Director general at the British Private Equity and Venture Capital Association (BVCA)

Other finance options

Corporate Venture Capital
Equity
Corporate Venture Capital is an investment made by a large company into a smaller business, in return for a share of that business.
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Leasing & Hire Purchase
Debt
A business can use Leasing and Hire Purchase to buy specific assets, like vehicles, machinery or other equipment.
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IPO
Equity
An IPO (or Initial Public Offering) is when a business sells shares via the public markets, such as the Main Market or AIM operated by the London Stock Exchange.
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