Many companies rely on investment to secure the finance needed to help them reach their goals. Such investment might be used for the launch of a new business or the launch of a new product or service, or to scale-up operations, or simply for maintaining the cash flow they need to operate daily.
There are many types of investment that you may want to consider, including utilising a private equity investor or firm. Pursuing this route can be an excellent way to obtain the money you need to achieve those ambitions.
Securing investment can also bring considerable value to your company in a number of ways, helping your business perform better within the market place whilst increasing its overall monetary value. You could enjoy increased success and improved results while your investors receive higher returns on their money.
In this guide, we explore how private equity investors create value for your business.
How can private equity add value?
There are many ways in which a private equity investor can add value to your business. We’ve listed them below.
Financial support
The most obvious way private equity adds value to your business is by giving you the capital you need to move forward. Private equity needs to work with more mature businesses, where a lot of equity options might be more associated with seed funding.
This means that if your business has plateaued or is looking to grow, you can access the finance you need to make this a reality and kickstart your expansion.
Hands-on guidance
Beyond the financial aspect associated with private equity, investors can offer a substantial experience that can shape the running of your company. Often, they will come from a background in business, or perhaps even specifically in your industry.
Through this expertise, the investor will provide hands-on guidance to help your venture succeed. This could include reducing your costs, optimising processes and upgrading the skills and assets available to your business. It’s in their interest to do so if they want a sizeable return on investment, so they are motivated to support you in achieving the best results possible.
With this, your company will operate more efficiently and have an increased chance of long-term success.
Growth
Another advantage of private equity investment is that it can fuel the expansion of your business, with the experience of your investors nurturing that growth and ensuring you implement the right strategy. This will enable you to increase your sales and market share.
By effectively scaling your company, you will improve your company’s value while raising your profile, which will go some way from taking your business and turning it into a national, or even global, powerhouse.
Expanding your profit margins
Every business wants to profit as much as possible. By growing your profit margins, you can ensure that more of the revenue from every sale goes toward your profit.
Data from American company McKinsey suggests that businesses that undergo private equity investment have improved profit margins of 3-7%. This is commonly achieved through better cost management and increased demand through effective marketing and sales strategies, creating economies of scale with your operations.
This means you can enjoy increased profit, which translates to a better return on investment for your investors.
Access to deals
Private equity investment can improve your company presence by refining your operations, creating the foundations for success and carving a dominant position in the market. As you improve in this way, you will be better able to access and win deals and opportunities, such as working with larger clients or picking up valuable contracts.
This will drive your reputation as a business, with more people likely to refer you to others while increasing your earnings through increased sales and revenue-pushing contracts.
Networking opportunities
In their bid to shape your business, investors will use every tool they have to support your ongoing success. This includes introducing you to relevant contacts in the industry who may assist your company at various stages of its journey.
Some investors will be part of specific networks that they can introduce you into, or they simply may have built their own set of contacts through their own experience. These could include potential partners, funders, staff or suppliers for your company, not to mention people who could become your customers in the future.
By unlocking these networking opportunities, you will be able to push awareness of your business while identifying the necessary resource and skills to help you fill any gaps in your operations, as well as find profitable opportunities.
Exit valuation
Finally, private equity is a great way to grow the exit valuation of your company – meaning that, whenever you decide to step away, you will get a better price for the sale of your business and leave with a healthy profit (as will your fellow shareholders).
On top of this, by having the support and funding to grow your business, you’re more likely to achieve your goals before you leave, which will appeal to many entrepreneurs. You might also get better offers to take over your company, providing the peace of mind that your legacy and staff will be protected in the next chapter of the business.
Things to consider
Although much can be achieved through private equity investment, there are also factors you need to consider.
Firstly, if you want the best possible support for your business, you need to find a hands-on investor who has the relevant experience to guide you. Investors will have set criteria they need to fulfil before committing, so your business will need to show promise, usually through a strong value proposition or commercially viable offering. You will also be asked to provide documentation to demonstrate the value of your business, such as a business plan including projections and your financial history.
If you decide to bring a private equity investor on board, you should also be prepared to listen to their input, which may influence your key business decisions. This means there may be instances where you must compromise, even against your planned strategies for your company.
As per the nature of investment, you will be expected to pay dividends to your shareholders, once certain key metrics are achieved. That being said, the work done by the investors should allow you to walk away with more than you would have done without their intervention.
Another consideration to make is the potential share dilution from bringing external investors. This may make it harder to attract shareholders in the future, so depending on your vision, you may need to contemplate how this might impact your plans.
Finally, you must ensure you have an exit plan for when the private equity investors step away. In some cases, this may be part of your agreement when you bring them onboard (for example, some firms will want to work with your business for a set number of years and recoup their investment in this timeframe). If there is no ‘end date’, you will need to negotiate this depending on your company’s aims. It’s also vital that, once the investor does step away, you’re still able to continue to build value in your company to prevent your efforts from being derailed.
Conclusion
Private equity investors can bring a great deal of value to a business, not just in terms of funding but also in supporting long-term success and growth. If you are looking for assistance to reach your goals while raising finance for your company, it may be a natural solution.
However, you must understand the factors involved before you agree to private equity. This will enable you to make an informed decision and find an investor that works for you. By doing so, you can ensure you reap the benefits for your business.
If you are looking to pursue private equity for your business, we can help. Our advisors can take you through the process and put you in touch with relevant investors and firms.