Private Equity & SME Growth

Buyout Option

Private equity partners may also become involved in a management buyout, which is the purchase of the business by its management.

A management team may not have the funds to purchase the business, so they can team up with an equity partner to fund the buyout. One of the bonuses of an MBO is the management team retain an equity interest in the business—as owners not just employees. This in turn creates an environment where the management team has more invested in the business, other than financial, and tends to create an environment where management is working together to pursue the same goals for the company.

When establishing an MBO, some of the things you need to consider include how much the business is worth, how much you want to invest, and a plan of exit strategies (for you and equity partners).

If you are considering an MBO or private equity partnership, be sure to talk to your financial services first.

Finding Investment Partners

There is no substitute for spending time with your potential private equity partner—the business is choosing a partner that will be very influential over future outcomes, writes Jeremy A. Samuel.

How do business owners find the right private equity partner? Different private equity firms focus on different sorts of businesses although there are some common themes. While Australians often use the terms venture capital and private equity interchangeably, venture investors will usually look more to early stage businesses whereas private equity investors will usually look for more mature, established businesses.

Private equity can help management teams to acquire businesses from founders through management buyouts (MBO). The new capital structure can then help those businesses to grow organically or by acquisition. Examples include ACL (Australian Centre for Languages), Netti and Godfreys.

Divisions of larger businesses that are not core to the overall company strategy are also often suitable private equity targets. Repco, Accantia/Swisspers, and John West are Australian examples. More recently, we have been seeing that ‘undervalued’ public companies (such as Just Jeans, Flight Centre, and Coles) can attract interest from private equity buyers.

Further, earlier stage venture capital investing can support companies with rapid growth needs such as technology companies (for example, Comtech, Hitwise, and Resmed).

So what do private equity firms look for? Their investment criterion vary. However, most private equity firms look primarily for a team of proven, honest managers who have established a good record operating the actual (or similar) business and can align their interests with investors.

Industry stability and strong business cash flows are generally attractive and will often lead to a more leveraged capital structure. This combined with substantial growth potential can enable the investor to feel more comfortable with the price for the business. However, a reasonable entry price having regard to the above factors and the future exit prospects is always important. Finally, good private equity firms will also only select companies where both they and the management team agree that the private equity firm can provide strategic and financial assistance and counsel to the business to deliver on its strategy. This is difficult to measure and often comes down to the fit between the individual personalities.