You have a successful business and you know you are ready to make the next big move. You have a proven business model and you need investment to drive faster growth and expansion. You are looking at the options for securing that investment. Private Equity (PE) is one of the options open to you. The main question you might have - is PE the right move for you and your business?

PE can be a fantastic experience that drives ambitious businesses to transform and grow fast. The potential rewards for management and investors alike are huge. The outcome is often a very successful, and valuable, business.

BDO regularly holds ‘Private Equity Demystified’ events for businesses considering their next move. The events are about giving you the information and understanding you need to make an informed choice on PE. The events feature speakers from PE Houses and portfolio companies. 

Exploring Private Equity

PE investors are looking for businesses with the potential to deliver a substantial return on investment in a relatively short time, typically between three and five years. The rule of thumb is that they aim to double their money in three years or treble it in five years.

As a result, PE firms or houses, look for specific characteristics that point to a potential for fast growth in value. These include the macro-economic environment and micro-economic considerations such as value, growth, margins and cash conversion. PE houses will also look at the owner and the management team and a range of other factors.

Each PE house will place a different emphasis on these elements depending on their strategy, appetite for risk and approach to working with and supporting portfolio companies. This will affect how they value potential portfolio companies.

It is the job of your advisor to help you find the right PE partners for you.

You have decided that PE is the right route to take for your company. You are about to ‘sell’ your business or at least a part of it to an investor who will become your key stakeholder, be represented on your board and, sometimes, on your management team. The challenge is to find the right investor. You should be looking for an investor who shares your vision for the business as well as an individual that you can work with as your key business partner.

Our advice is always to start by defining success for you and your business. 

• What are you trying to achieve? 
• Are you looking for monetary value? 
• Are you concerned about your legacy? 
• Do you have a vision for your business? 
• How does the PE investment help you achieve that? 
• How much investment do you need to achieve success?

How BDO can help you get the right Private Equity deal

From helping you define what you are trying to achieve to completing a deal and beyond, we will guide you, so you avoid pitfalls and common mistakes, mistakes that you need not make. We have an extensive network of relationships with PE Houses and an understanding of their individual strengths and specialisms that comes from having completed many deals and worked with many PE-backed companies. There is simply no substitute for that kind of experience.

BDO works predominantly with ambitious, entrepreneurially-spirited businesses. We understand how to help them achieve their goals. In the process of completing a PE deal, we will take the time to understand you, your ambitions and your business. It is that understanding of what makes you tick that will enable us to effectively act as your champion through the complex and time-intensive process of completing a deal. We want you to have the confidence to rigorously vet investors to make sure you find the right person to work with for the next three to five years.
There are three main areas where we will provide you with advice and support - readiness and preparation, marketing, and deal completion.

 Readiness and preparation

It is at this stage that you will begin to establish the fundamentals of your PE deal. You will need to agree on a timetable and approach with stakeholders. Are you considering a dual-track approach to finding investment, looking at a trade deal as well as PE investment? Your business plan and marketing information must tell your “equity story”, set out and provide concrete factual evidence for the investment hypothesis that you will take to investors.
 You will also need to recognise, anticipate, and provide plans to mitigate areas of potential risk and challenge. You must start preparing the information that will support a deal, remembering that you will typically partner with your private equity backer for three to five years.

We can provide advice on all areas of your business to prepare for a PE deal. This goes from helping you formulate an “equity story” to planning resources and project management for completing the deal. Working with your senior team, we can help identify and seize opportunities to improve business performance, manage risks, and ensure the business is ready.

The services we can provide include: 

• Help you define what success means to you, your team and your business
• Building a robust business plan and underlying financial model with a returns analysis
• Decide on your deal strategy to match your goals by looking at price, types of potential investors and timing
• Fix or create plans to overcome operational issues
• Help build a secure and comprehensive online ‘data room’ with information and content for investors
• Prepare the Information Memorandum and other accompanying selling materials
• Prepare Vendor Due Diligence including for tax and financial information
• Take initial sounding of the PE market and track market activity to determine optimal launch point

Marketing

With stakeholders aligned around a clear definition of success and a business that is geared for sale, you are ready to take your investment hypothesis to investor and generate interest and competitive tension.

The services we can provide include:

• Build and rehearse a credible management presentation
• Lead buyer interactions
• Manage investor enquiries and multiple advisors
• Identify and deal with difficult issues and questions
• Understand and guide valuations to drive meaningful offers

Deal completion

Deal completion is about moving from a shortlist of potential investors to securing a deal with a single investor. You will move from informal conversations and non-binding offers to a final Sale and Purchase Agreement, a ‘management deal’. This will involve legal, tax, and financial advisors on both sides and a great deal of high-pressure negotiation.

The services we can provide include:

• Manage interactions with all legal, tax and financial advisors
• Negotiate final offer to completion
• Negotiate an incentivising management deal that aligns interests
• Ensure that risk and reward are balanced
• Deliver an optimal tax structure

The final way we can help you is to begin preparing the management team for the next stage of the PE process: the challenge of delivering on the equity story and driving the value growth that investors expect.

Two simple actions will improve your chances of having a positive and rewarding experience in Private Equity. Our Private Equity Team can help you with both.

Define "Success"

The first step is to define what success is to you and your business. PE investors have a simple definition of success; they typically aim to double the value of their investment in 3 years or triple it in 5 years. How you and any other stakeholders define success may be as simple as a monetary value but is usually much more complex.

• What do you want your business to look like?
• What is your driving ambition?
• Is legacy important, or is money a key motivator?
• What do you want your future role to be?
• What will happen to the other people who work for the business?

With a clear definition of success, it becomes much easier to navigate your way through the vast number of PE funds and firms to find the right partner whose goals, specialism and culture align with your vision.

Prepare

The second thing you must do is prepare. You must prepare your business so that it is in the best possible shape for an investment, looking at every aspect of the business for gains in efficiency. You will need to prepare for a step change in financial reporting to keep investors satisfied. We would also advise you to look at a ‘Due Diligence’ questionnaire so you understand the sheer volume of information you will be asked to produce for potential investors as part of making a deal.

At the heart of the Private Equity (PE) process is the investment thesis or “equity story”. This is how the portfolio company will deliver the value growth that investors expect. It is what you, the portfolio company management team, must deliver on.

Achieving that kind of hard and fast growth means transforming your business. You will need to be a thoroughly effective leadership team, seeking to adopt best practice across every area of your business. The transformation of your business will often involve a process of scaling up across the board. The challenge is to make sure the interests of the stakeholders – management, company, and investor – stay aligned throughout the process.

 How BDO can help you grow

BDO’s PE team will generate the ideas and insights to help you find the right way forward for your business.

Our expertise comes from the hands-on experience of taking hundreds of businesses through Private Equity. We are results-driven and help our clients achieve their goals. We work across the full range of audit, tax and business advisory services. We will work with you to ensure that every area of your business is geared towards successfully delivering on the equity story.

Below are some of the areas where we can provide the advice and ideas that will help your company become a successful PE-backed business.

 Performance and Growth

We will help you refine your business strategy to drive top-line growth and improve margins. We can help you define your investment priorities and ensure that whether you are investing in acquisitions, people or technology, that investment is effectively supporting accelerated growth.

 Financial Management and funding

The most effective business leaders know how to sweat every asset and every pound. We will work with you to improve cash flow and the efficiency of your tax and financial structures. These improvements will make it easier to manage your bank and other funders and fund acquisitions. We can also provide specific advice and practical support in these areas.

 Operational Improvement

Taking some time to properly investigate what positive impact can be achieved through making operational improvements is well worthwhile. Our experience is that most companies can drive greater growth, higher margin, better cash conversion and reduce risks when they set their minds to it. The question is whether the returns are worth the investment. We will help you benchmark your operational effectiveness, devise pragmatic, down-to-earth plans that can be delivered within your time frame and advise on or help deliver the implementation of any changes that are decided.

 Governance and leadership

We will advise you on the appropriate and most effective governance structures. The aim must be to maintain alignment around the business strategy and ensure that your management team are able to deliver. We often find that the biggest impact comes from addressing any gaps in the management team. This can mean bringing in additional expertise in the form of Non-Executive Directors or adding PE experience to the management team.

 Risk, management and financial reporting

PE investors will demand high levels of management and financial reporting. Are your systems up to the job? We can help improve your reporting system and advise on regulatory compliance as new requirements become relevant. Our aim is to ensure that you minimise risks by putting in place the right reporting and compliance structures.
  

Strategy

Your strategy is the foundation on which all growth is based. It should help you answer some of the following questions:

• What M&A activity should you pursue?
• Where will new revenues come from?
• What is your international strategy?
• Who is going to buy your business when it comes to realising the gains you have created?

If your strategy isn’t doing that, we can provide advice on developing it. We can also work with you to secure stakeholder alignment around delivering it.

From the first day of taking Private Equity investment, you should have one eye on Exit and how you will realise the gains in value. Your initial ‘equity story’ may well have had some indication of how exit would be realised by identifying potential buyers for the business.

The process for securing a deal that realises gains and ends your current Private Equity investment cycle is largely the same as the one you went through to find your PE investor in the first place. Certainly, many of the key stages are the same.

There is, however, a single factor that changes everything. Any deal must satisfy your current PE investor’s need for the best possible return on investment. It will largely define the success or failure of your PE experience. It will also affect your choice of investor for the exit deal.

A further consideration is whether you and your management team want to continue managing the business. If you do, the choice of the next investor will be very important and may clash with your PE investor’s need for maximum returns. Conversely, you may be looking for a complete exit, which may impact the business's value and the returns your investors can make.

 How BDO can help

The BDO Private Equity Team will provide all the support you may need to complete the optimal deal at the end of a PE investment. Whether you are trying to exit or want to continue leading the growth and development of your company, we will help you find the right way forward with your current PE house. This may range from a trade deal to a further round of PE investment or an Initial Public Offering.

Specifically, we will help you to:

• Identify the best route or routes to achieve success for investor companies and management
• Prepare all the information required for a deal
• Prepare your business for a deal
• Find the optimal moment to sell
• Find the best value in the market
• Identify potential overseas investors and buyers
• Build and maintain buyer interest and competitive tension
• Establish the most tax efficient structures for Exit

BDO PE specialists regularly support PE firms in completing deals and investments. We have a full-scope buy-side offering including sector or sub-sector mapping, approaching and introducing investment opportunities, modelling, valuation, assistance with writing investment committee papers, exit papers, buy & build target identification and analysis, debt advisory, project management and negotiation support, often as part of a team including tax and due diligence professionals, from BDO and other firms, and lawyers.

We offer insightful and detailed knowledge because we know and have worked with the target or similar businesses. We also understand the vendor mindset, especially that of the entrepreneurs who lead potential portfolio companies. We will help you find the common ground and understanding that will set you apart from other potential investors and more likely lead to a successful investment.

Due diligence work is about removing any unwelcome surprises and mitigating risks, ensuring that PE firms and investors have full visibility of all issues and risks. You want to understand fully the business you are looking to invest in and know the risks and opportunities of a transaction.

Our sector expertise and mid-market experience mean that we are well-placed to carry out due diligence on portfolio companies in most sectors of the economy. We regularly and routinely conduct both buy-side and sell-side due diligence work. We understand the pressures PE firms are under and the importance of getting the due diligence and broader transaction services right the first time, every time.

Our transaction services work includes financial due diligence, tax due diligence, IT and operational due diligence.  We also have expertise in the negotiation of completion mechanisms and SPA advice.

We work with Private Equity firms to help them comply with their local tax filings and provide annual tax reporting information to their investors and executives. Our PE tax team understands the nuances of private equity structures and works with technology to deliver flexible systems, processes and robust tax reporting solutions. We also advise private equity investors and executives on their personal tax positions with a particular emphasis on complex situations such as the UK remittance basis, carried interest and managing tax credits for US taxpayers.

Our team focus on providing advice covering the tax consequences at the time of acquisition, throughout the period of ownership and on exit. Our goal is to provide investors with a real understanding of the overall post-tax returns. We combine pragmatism with expertise to suggest structures that fit with the fund’s commercial aims. Our people are skilled in understanding the issues of all stakeholders in a transaction, including not just the underlying corporate but also management teams, GPs and investors, so we can help devise a best-fit solution.

We work with a large number of PE-backed businesses. We understand how portfolio companies operate, their challenges, and their ambitions. Our sector-specific expertise and tailored advice makes a difference to their bottom line. Our aim is to help them achieve the accelerated growth and rates of return that their investors expect.

Our financial and operational advisors will help portfolio companies identify and implement improvements to their financial and operational effectiveness. Our experience is that our clients benefit more from our advice when they involve us as early as possible in tackling improvements.

We understand that a portfolio company is always for sale for the right price. Preparations for sale and exit should start from day one in order to prepare for the best outcome. Our PE specialists will work with you to prepare for a successful exit. We will undertake an “exit readiness” review and deliver Vendor Due Diligence, support the creation and maintenance of a Data Room, as well as reviewing all financial, tax and operational arrangements to ensure that the portfolio company achieves the best return possible.