Matt Gilbert
April 25, 2023
What are the key attributes that businesses need to possess in order to attract growth capital investment from private equity? Private equity investors typically look for businesses with specific qualities that indicate strong growth potential and the probability of a high return on investment. Here are some of the key features these investors desire:
a. Strong and Scalable: A company must have a solid business model that has the potential to grow and generate significant profits. If the business model is scalable, that is even more attractive. Investors want a business that can generate substantial returns in the long run – which might involve tapping into new markets, developing new products or services, or scaling up existing operations.
b. Proven: Professional investors want to see that a company has a proven record of success and profitability. They will look for a solid plan, realistic financial projections, and historical evidence that the business has a sustainable competitive advantage. Providing evidence of past successes such as customer testimonials, case studies, and financial results helps to demonstrate the strength of the business.
A business plan is important and outlines the company's goals, strategies, and steps for growth. Investors want to see a business executing a clear and concise plan encompassing vision, mission, and objectives.
A strong management team is essential for attracting investment capital from private equity. These buyers typically want to see a management team with a proven record of accomplishment and experience in the industry. A team with a clear vision of the future can inspire confidence. Private equity investors will look to see that the management team has the skills, expertise, and experience necessary to successfully execute the business plan.
Private Equity buyers want to see a strong financial performance from the business, including a solid revenue stream, healthy profit margins, and a clear path to sustainable profitability. They will also want to see evidence that the company has a check and balance system for managing cash flow as well as a strategy for reinvesting profits back into the business.
A company must have a competitive advantage over its peers, whether it be through location, technology, intellectual property, brand, dominant market position, or other factors. Skilled investors want to see that the business will be able to outperform its competitors in the long run.
Private equity firms are incessantly focused on managing risk, and they want to see evidence that the business has a plan for controlling risks effectively. This includes a solid understanding of the competitive landscape, potential regulatory hurdles, HR challenges, and other risks that could impact the business.
A business with a clear market opportunity and a solid strategy for growth is attractive to investors. Private equity firms want to see that a company is operating in a stable market with significant growth potential. There must be a clear strategy for capturing a meaningful market share. Investors will want to see if the business has contingency plans in case the market turns stagnant. Proving the company’s viability regardless of market conditions will be critical. Actions like expanding products or services, diversifying the customer base, building strategic partnerships, and improving customer experiences will all help attract private equity investment capital.
Private equity firms typically want a significant ownership stake in their portfolio companies, often with the goal of eventually selling the company for a profit. Through their transaction advisors, business owners should be prepared to negotiate terms that are mutually beneficial for both parties.
Without question, private equity firms will conduct their own exhaustive due diligence to assess the company's financials, operations, and potential for growth. It is important for a business owner to be prepared for this critical step – including keeping concise and accurate records, demonstrating transparency, and providing detailed information in order to help the investors make an informed decision.
Private equity investors want to outline a clear future strategy, with a plan in place for how they will eventually exit and realize a return on their investment. This could involve a sale of the business, an initial public offering (IPO), or other exit options.
Businesses that possess strong financials, a competitive edge, clear growth prospects, an adept management team, scalability, and a well-defined exit strategy are usually appealing to private equity investors. By aligning with proven transaction advisors and prioritizing these key attributes, business owners can position themselves for the likelihood of securing investment capital from private equity.
If any of this resonates with you, we encourage you to take our M&A Discovery Questionnaire and talk with us to see if your business makes the cut as one who can still command a great exit in this M&A environment. We will be in touch quickly to discuss the results. Click here to take the assessment.
Gilbert & Pardue Transaction Advisors (GaP) is a Houston-based business advisory firm serving lower middle market and middle market business owners from coast to coast through representation for Mergers & Acquisitions (M&A).
Matt Gilbert and Bret Pardue established GaP to provide owners of lower middle market and middle market businesses – those businesses generally enjoying annual revenue of $10-$80 million – with the quality of M&A representation and value-enhancement services previously only available to upper middle and large businesses. GaP brings highly experienced executives, sophisticated financial and marketing products, proven-effective processes, and fully-integrated expertise to every engagement. No other M&A firm serving the lower middle and middle markets provides the quality of representation and transactional expertise that we do.
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