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To sell or not to sell, private equity 101

With inward investment into the UK food and drink industry at a three-year high, and Kraft Heinz’s short-lived Unilever takeover bid fresh in the minds of consumer and FMCG business owners, private equity funding is an increasingly viable option for many fast-growth firms.
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British brands represent an attractive investment option – entrepreneurs need look no further than the likes of Tyrrells potato crisps and Fever-Tree tonic water for examples of businesses that have flourished following an injection of private equity capital.

In today’s increasingly saturated FMCG marketplace, the need for financial resources and top-quality talent go hand in hand. Even the most brilliant entrepreneurs cannot go it alone, having a trusted and loyal management team behind them is essential. Not only does this provide a true basis for differentiation against competitors with similar product offerings, but it is this continuity that allows for long-term succession planning and sustained growth.

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If executed correctly, private equity investment can be an extremely attractive basis for capturing industry-leading talent. Often, experienced hires and rising stars are enticed by the high risk, high reward nature of fast growing businesses, with the offer of equity-based remuneration schemes providing a once in career opportunity to create lasting legacy and reap significant financial reward.

However, strike the wrong deal and the changes imposed by the private equity investor could prove catastrophic, watering down the company’s values, culture and ethics in a manner that alienates staff, breeds dissatisfaction and impedes the hiring process.

Do your research

When examining potential investment offers, it is imperative that business owners are not seduced by numbers and take the time to evaluate an investor’s promises against its track record. For example, while all private equity investors part with capital in the pursuit of a fast and considerable financial return, understanding a partner’s typical deal timescales from investment to sale is vital.

While an investor may allude to an intended five to seven-year turnaround, which is likely to prove attractive to the businesses owner – as it suggests a long-term commitment to the company and its development, if its previous investments have been offloaded after two or three years, this would suggest a similar fate awaits future partners.

Similarly, business owners should examine the level of investment that has been made during previous partnerships, in what areas and crucially, the results. An investor that can prove it puts its money where its mouth is and devotes funds to facilitate growth, whether it be via capital expenditure, new business and marketing, international expansion or product development, should be held in high regard.

Protect the culture

A company founder who is offering equity in a business in return for investment is at the peak of their influence during the negotiation stage – it is imperative that this opportunity is fully leveraged and preserving the business’ culture within the terms of the contract agreement must be a priority.

Whether this involves securing certain levels of responsibility and progression for the existing management team, or ensuring employee benefits are protected, the private equity investor’s attitude towards these demands will often reveal its attitude towards staff retention. If these requests are met with a flat-out refusal to negotiate, seek an alternative.

Secure a two-way partnership

Aside from providing much-needed financial assistance, investors can also offer invaluable strategic insight and industry know-how to the existing leadership team. This is again an area where figures should be examined in the context of how many industry connections the investor has, its level of technical expertise and relevant market knowledge.

If for example an FMGC brand is looking to navigate its route to international markets, then securing advice from a consumer export specialist could be hugely beneficial. Identifying potential business mentors and asking that they take a position as a non-exec director or advisor provides the opportunity for partners to add significant value.

For the UK’s contingent of fast-growth, high-potential FMGC brands, attracting private equity investment is often a catalyst to international expansion, securing lucrative contract opportunities and retail listings or innovative product development. While unlocking funds is a key driver for business owners, this investment must go hand in hand with employee retention and the attraction of top-quality talent able to support stable and sustained expansion.

When selecting a potential investor, ensuring the business’ culture, values and ethics are protected is essential – prioritising these discussions at the negotiation table and examining partners’ track record is instrumental in selecting a best-fit investor.

Simon Walton is head of the consumer practice at executive search specialist Berwick Partners

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