What is private equity investment and what are the benefits?

24/04/2023. Private equity investment focuses on securing capital that can be used to facilitate your growth plans or de-risk your investment by extracting capital from the business.

What is private equity investment?

Equity finance essentially means selling some or all of your shares in the business in exchange for a capital injection. Equity investors can include venture capital providers, angel investors, or private equity firms.

What are the benefits of Private equity investment in my business?

Private equity investment provides expertise from investors that have extensive experience in operating a variety of businesses, not to mention capital that can be used to fund investment in technology, marketing, new offices or to make acquisitions. This additional funding and knowledge provide a great platform to grow the businesses and/or expand into new territories and products/services. They will be able to use their knowledge and industry connections to support your growth plans and provide a sounding board to help meet your goals.

With private equity investment, you can still retain some ownership of the business. They will seek to align your interests with theirs so that you are all incentivised to make the business a success. Given the additional funding and potential for future growth, it may be in your best interest to sell part of the business now while retaining some ownership then selling the remainder of your shares at a higher price later on.

What do you need to consider if obtaining private equity investment?

Whilst Private equity investment can help to secure funding to meet your strategic objectives there are a number of factors to consider, including:

  • When securing funding via private equity this will mean giving up a proportion of the shareholding in your business. Depending on the investor and their specific style, as well as the percentage you sell, they may seek to influence decisions from a strategic, operational and leadership perspective. This will likely include having a Non-Exec seat on the board.
  • Most Private equity investors have a three to five year time horizon to realise the ROI on their investment. This can lead to pressure on the business to prioritise short to medium term results over longer term growth. However, some Private Equity Houses and Family Offices will have longer term time horizons. You should ensure you partner with an investor who shares your objectives and timings.
  • With private equity investment there may be some additional costs to the business such as interest payments and management fees as a condition of investment
  • When there is a significant Private equity investment in the business it can impact your exit options as the investor has input in the timing and terms of any sale or exit.

What’s next?

The process for private equity investment and its due diligence can be a somewhat lengthy process that requires a lot of work and insight. The first step you should consider is how much of your business you want to sell, as well as the purpose of the capital you raise. It’s also important to make sure your financial, accounting and cash flow systems and reporting are robust and able to withstand detailed due diligence. If this option is right for you, we have strong relationships with successful equity investors we can connect you with and will be able to help you identify gaps and areas needing to be addressed as well as understating any tax implications. It will also be important to pick the “right” partner from a cultural, personality and style perspective as this can be as important to the success of the business, especially if this is the first time you are taking on external investment.

Get in touch

If you’d like to know more about private equity investment and how our team of deal advisory, tax and financial planning advisors can assist, please use the contact form below.

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How we can support you if you are looking to secure private equity investment

Our deal advisory, tax and financial planning advisors can support you through all stages of private equity investment. We will work with you to:

  • Help you understand what your business is worth and what you can do to maximise that valuation
  • Help “demystify” Private Equity and explain the pros and cons of taking on new investment
  • Understand your key objectives and timing so that we can help advise on the right transaction structure
  • Help you approach and engage with suitable investors for your business using our extensive Private Equity network of relationships
  • Understand your objectives and approach to find the right partner, not only based on financial metrics but non-financial ones as well, such as personality, sector experience, previous investment performance and house style
  • Prepare marketing materials that will position your business in the best light to potential investors, including a business plan, teaser, and information memorandum
  • Help you prepare the business for sale, including gathering financial and other information to ensure you are ready for a potential investor’s due diligence process
  • Work with you to understand the potential future value of the business, using our financial modelling experts, to help you compare and contrast different investment offers
  • Design a bespoke process and manage it closely from inception to completion, liaising with the various legal and accounting advisors, creating competitive tension amongst investors, and minimising the burden on you as you continue to run your business
  • Advise you and negotiate on your behalf all the key elements of the transaction to ensure you get the best deal possible
  • Advise you of your potential tax exposure for any relevant transactions, both for you personally and the business to ensure you have clarity over your net proceeds from a deal
  • Undertake a thorough exploration of your individual circumstances as well as the business in order to identify and consider any tax reliefs that may mitigate your tax exposure and ensure any tax traps are understood and navigated in order to provide a bespoke tax plan as part of your strategy
  • Advise you on alternative deal structures to ensure tax efficiency, where appropriate
  • Manage and obtain relevant clearances from HMRC on your behalf, where appropriate
  • Advise you of your reporting requirements to HMRC in order to minimise the burden and give you peace of mind
  • Calculate the level of capital required from the sale to meet your objectives and provide security, using sophisticated cash flow forecasting tools. This helps you understand what is needed and what is aspirational when entering negotiations
  • Advise you on how to invest the sale proceeds to meet your objectives, including a review of existing investments and pensions to ensure they are used to best effect
  • Work with you in advance of the sale to agree to a personal financial plan, so plans and investments can be implemented efficiently once proceeds are received.

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