Let’s start with the fundamentals, namely those issues that will help the business stand out from the crowd:
1. Personal introductionsAs with winning new customers, raising private equity is a sales process that will result in a long-term relationship. So – before entering into any transaction – take time to understand more about the firm and what they will expect from you.
If at all possible, only contact funding firms following a specific introduction from a third party, unless the private equity fund has a specific policy of only accepting online applications. This is not just to line the pockets of brokers! A personal invitation will improve greatly your chances of securing that all important first meeting.
As a general rule, private equity houses receive around 400 business plans each year and only invest in a handful – literally three or four. As around ten per cent will be fortunate enough to secure a first interview, doing so increases your chances of success by a factor of around ten times!
2. Executive summaryWhile there is no escaping the need for some form of business plan (whether a formally written document or a detailed slide show), an executive summary gives investors the chance to determine, in short order, whether this company is for them. It is one of the most important documents but can be difficult to write.
The summary should ideally be no longer than two pages. It should explain in clear, concise and precise language: what the business does (ie: what products and/or services it provides); what makes it different from other suppliers (ie: what are the unique selling points, whether price, range of features or other factors); what has been achieved to date (ie: sales and profit for the past few years); who are the managers and what have they achieved (in summary) in the past that is relevant to this venture; and the outline terms for this funding round.
While the contents must be accurate, this is a selling document! Therefore it must highlight the key benefits behind the investment proposal for this company, eg: £5m private equity investment into a business that has significant barriers to entry, international patents and expects a trade sale within 18 months (two targets already identified and initial discussions underway) giving an IRR of 40 per cent.
3. Realistic sales growthOne of the more difficult balancing acts when preparing a sales forecast is to determine whether it is too conservative (meaning the business could look dull, even mundane) or too optimistic (where the assumptions might be considered unrealistic). But it is the area over which private equity firms spend most time running their slide rules!
While it has become fashionable to include low, medium and high forecasts, this often results in the private equity firm focusing on the low figures and so it might be better to list all of the various assumptions that underpin the forecasts and show the outcome if these are achieved, eg: if the aim is to increase sales revenue by 300 per cent over the next three years, demonstrate:
a. How this will be achieved and in which markets or territories.b. Who will oversee the plans and what are their relevant skills.c. Who are your competitors (and why) and how their threat will be overcome.d. The external factors (e.g. new regulations, changes of government) which might affect the forecasts and how the company intends to minimise their impact.e. Whether there are any major changes in customer taste that are in-built into the assumptions and, if so, what percentage over what period, eg: moving from high-street shopping to online.
4. Strength of the management team.
Outside of the business idea, the strength of the proposed management team is probably the most critical aspect in terms of successfully raising equity. A well rounded team, that is capable of demonstrating it can achieve its objectives, is essential and considerations include:
i. Has the team worked together before, if so when and what was the outcome ii. What experience does the team have in driving this type of business, ie: they may be successful in blue-chip organisations, but have they ever managed a fast-growing company through to exitiii. Who will cover the critical internal functions – finance, sales and marketing” What is their experience in relation to the businessiv. How much is the management investing” If the team is unsure how much they should invest, the golden rule is “enough to get them out of bed every morning but not enough to keep them awake at night with worry”.
5. Realistic termsFinally, the terms of the transaction are critical. Before entering into any discussions with a private equity firm, it’s essential for the management team and the shareholders to discuss what investment parameters will be acceptable.
A realistic valuation is the starting point. It is certainly worth having an independent third party take a look at the business to indicate what they believe it is worth. While they may take into account potential significant growth in the future, most venture capitalists, especially in the present market, will take little account of these prospects when determining the current value. A ratchet scheme, whereby some of the equity may be clawed back from the fund if the team delivers on the forecasts, might be advantageous.
Keep expectations of current valuation to a minimum and focus on how the present management team and shareholders can benefit from growth of the company in future.