Paul Putnam, Audit Partner, and Sam Phillips, Transaction Services Director, at PKF Francis Clark offer some tips on preparing your business to attract equity investors.
Significant levels of debt funding have been made available in the last 12 months, but with the vaccine rollout boosting prospects of economic recovery this debt will need to be repaid. We expect this to lead to restructuring, which is likely to involve equity investment since private equity have funds ready to deploy.
Preparing to receive equity investment is typically a more intense process than management teams expect. Addressing the following issues early on will help you to become equity investor ready:
- Prepare yourself mentally to give up shares in the company – As one of our clients said recently, without private equity investment he would still own ‘100% of nothing’. He recognised that the cash (and expertise) that the investor brought had made the difference and now he has a share in a company valued in excess of £10m
- Understand the market – Understand what different investors bring to the market you are operating in. You are looking for a match between your wants and theirs.
- A good quality equity investor who understands your market will be able to support management and increase value. But be warned, they will require good governance and you will need to give up an element of control
- Understand the maths – If we stereotype equity investors as wanting a return of three to five times their money within three to five years, you need to work out whether your company has that growth trajectory – and, if so, what your exit plan is to crystallise that value, whether that’s an IPO, trade sale or an alternative equity investor. A good equity investor will support you through this process
- High quality data – If you don’t have up-to-date, granular insights into how your business is performing – and how you expect it to perform in future – you are limiting your ability to secure investment. You may also be limiting your opportunities for growth, and therefore value from equity investment. This is even more important in a remote working environment where the usual physical, more operational, KPIs are not as accessible
- Strength of management team – We have seen a change in the standard investment model, accelerated by Covid-19, with recent IPOs being founded on the strength of the management team and future opportunities they might bring. Therefore, ensure you have a well-rounded team to support you
- Understand what can go wrong – Put yourself in the potential investor’s shoes, consider the risk areas in your business model and what mitigating actions you can take. Document these risks and have sensitised data to show how they might impact on the performance of your business
- Prepare your pitch and be prepared for questions – Make sure you have pre-empted questions such as those outlined above, but do not expect potential investors to instantly get your proposition. And make sure your projections are robust and defendable. Potential investors will ask questions and look to verify information.