Raising Finance

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Making your business attractive to private equity houses

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Equity finance is a way of raising capital from external investors in return for a share of your business. It’s a viable option for many SMEs with high-growth potential that are looking to raise substantial investment sums which banks or other lenders are unable to offer them.

Our corporate team at Shoosmiths advises businesses right through the business life cycle from start up and first round finance through to mergers and acquisitions and/or development funding and on to exit. An exit may be by way of sale, listing or private equity investment. We have a wealth of experience in advising companies who are looking for private equity investment.

One such company was Clearwater Group, a provider of a range of water treatment services. I advised the exiting shareholder and the management team of Clearwater on the acquisition by Baird Capital of a majority interest in the Clearwater corporate group – a deal which will take the Clearwater business to the next level in its evolution.

This was a great transaction to work on and a sound example of how private equity can really transform your business and drive forward its growth.

Unlike securing finance from a bank that will charge interest and require regular capital repayment, private equity investors only see their desired return on their investment if your business succeeds. Therefore, they will want to have real involvement in the business to guarantee its success.

As with any type of investment, there will always be strings attached and those strings can feel very limiting if you don’t share the same vision as your backers. Relationships are key to a successful private equity deal. I always advise clients to ask themselves whether they can see themselves working in partnership with the investor before making that jump.

Read more on private equity:

Private equity houses raise their own funds, invest them in your business and then at the right time sell their equity stake to repay the cash to their own investors. Therefore, they need to see that you have a strong business plan in place and realistic financial projections which demonstrate sustained growth. In addition to your profitability, they will take factors such as your sector, your market position, and key assets into consideration when valuing your business. 

Private equity investors will have different terms but most will invite their own directors to join your board of directors and will appoint an independent chairman to provide a neutral, objective view on board decisions.

If you still think private equity is for you, then it’s important to make sure that your business is investment ready so that you can secure the best possible deal, minimise risk and deliver the return on investment that private equity investors are looking for. Here are some guidelines on how best to proceed:

Be realistic – don’t over or under estimate your financial projections and carefully consider the amount of capital you need to deliver them
Understand the market – approach the right investors for your business and your region
Look beyond the money – consider which investors can offer useful knowledge and experience as well as capital
Be objective – take a step back and look at where there might be risk for an outside investor – for example, employment terms of your workforce, your property portfolio or share option schemes for staff
Negotiate your terms – make a clear commercial agreement with the investor on the level of control required by the investor before the legal drafting begins – this can be done using an equity term sheet covering key issues/areas
Strengthen your management team – investors need to know that your management team has the talent to lead your business to success. If a key member of current management wants to leave on or shortly after completion of the investment, who will replace them?
Get the right legal advice – our legal experts advise on all investment terms of private equity deals and actively support management in getting the deal done while running their business at the same time – which is always tough

Lynn Knight is a corporate partner at Shoosmiths

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