What You Need to Know About Private Equity

Private equity firms that specialise in buying and managing companies before selling them for a profit have shown increased interest in the contract security and cleaning industries. This newfound interest stems from the resilience that these industries have shown throughout recent economic downturns. 

Field service industries overall appear more attractive to private equity firms because of their recurring revenue model, profitability, and that they tend to be more recession-resistant than other industries. 

Advisors to private equity firms predict a rebound in private equity deals later this year due to subsiding inflation, meaning that interest rates are expected to fall, so the cost of capital should be less expensive for these private investors.

While planning for the future, you may be considering private equity ownership for your business. Or, you may have already been contacted by a private equity firm. To better inform you, we’ve created a two-part blog series. In Part I, we’ll take a look at what you need to know about private equity. In Part II, we’ll reveal what type of company data potential investors will want to review.

What is private equity?

Private equity describes investment partnerships that buy or manage companies typically unlisted on a stock exchange using a pool of capital from institutional and accredited investors. Those funds are used to support companies that need financial resources to grow, with the end goal of earning a profit when the company is eventually sold again. 

Private equity groups (or PEGs) are typically led by a group of executives with a good track record in running large businesses and, on average, these investment firms hold onto companies for 5 to 6 years before selling.

Unlike venture capitalists, most private equity firms avoid startups and instead invest in relatively mature companies. Private equity firms are also known for:

• Investing in privately owned companies, as opposed to publicly traded companies
• Seeking to acquire majority ownership in a business 
• Allocating resources to businesses in need of financial resources to grow
• Working with mature companies with an existing business plan

Considerations for partnering with a private equity firm

If you are considering working with a PE firm, ensure that the investment group is a good fit for your business. Seek firms that you would like to build a partnership with and understand the investors. Know their reputation to ensure their values align with your business. Also, keep in mind that transparency between both parties is key.

During the discovery process, you’ll want to ask potential partners high-level questions to determine if they would be a good fit for your business. Some questions to consider include: 

• Who are the daily contacts that I could work most closely with?
• What kind of firm are you? 
• What is your investment hold period?
• What have you done with similar businesses?
• What experience do you have in my industry?
• How much control would your firm like to have over my business?

A benefit to working with a private equity firm is that they may offer specialised expertise to help with expansion. For instance, a private equity firm may be able to offer support by updating a business strategy, offering industry connections, adopting tech or entering new markets. Expect a private equity firm to bring in its own management team to offer support with pursuing fresh initiatives and executing a well-coordinated business plan.

Maximising the opportunity 

Like any business venture, leveraging a partnership with a private equity firm in your favour takes careful planning. Know your business goals and spend time planning how this move will impact your current employees. 

Know what you want your level of involvement to be to help dictate who the right buyer is for your business. Generally, PE firms require a majority stake, but at times, private equity investment could potentially either be full or partial ownership.

With full ownership, the private equity firm would have total control of business decisions. However, they may want the owner to stay on board in a consultative role. Partial ownership could be a good fit for business owners seeking capital investment. 

The additional resources as part of a partial ownership could take a business to the next level without assuming the full financial risk. In this case, the founder would retain some ownership of the business. At the same time, they may also remain actively involved in the company after the sale. 

Investment partners will want to know your business plan to help decide why your company is a sound investment. They may also want to know if or how you are going to help reach those company goals. Questions potential firms may ask include: “What can we help you with?” and “What is your vision?”

Making the right decision for your business

Partnering with a private equity firm could bring the kind of support your business needs to execute growth. Accessing capital, experience and connections could easily set your company on the path to success. In short, working with a PE firm presents a long list of potential benefits. 

However, it all comes down to fit and timing – when the time is right for you, and who you feel the most comfortable working with. It’s always ok to say, “I’m not quite ready.” 

Stay tuned for our next blog, where we’ll take a look at the role of your company’s data in the mergers and acquisition process. If you have questions about private equity, send us a message, and we will put you in contact with our in-house expert.