- Finance
- November 15, 2011
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How Does A Private Equity Firm Size Up Potential Companies For Acquisition?
by Shaival S Trivedi
Do you think your business has reached a point in its lifecycle where you think an infusion of private equity will take it to the next level? If your answer is in the affirmative, you need to be aware of the critical success factors that would make such a PE investment viable for you and your business. We may think that our business could not go wrong, our white papers and business plans are perfect to the T. However all entrepreneurs need to think through their value proposition that they want to present to the various PE firms they plan to meet during the road show and essentially think from the point of view of the Private Equity players. What would be the due diligence points that most PE firms focus on while evaluating a potential deal? I think one needs to think through these critical areas before presenting a smart almost foolproof plan to the investors in order to ensure a sizable investment proposition from them.
Is the market conducive?
An economy that is on the upswing, with rapid development across all spheres, is loved by the investors. So if your business is located in the BRICS region (for example) and you have a water tight value proposition for funding further growth, then your chances of securing that funding are very high. On the other hand if you operate out of a very narrow market with a lot of regulations in the financial sector, then your value proposition is a virtual deal breaker. Kaput! Do not have a very optimistic view of securing funding in such a market.
Who is at the helm of affairs?
This factor is very decisive in ascertaining investment decisions. Are the people behind the venture the right mix of management expertise and talent relevant to the business growth? Will they be able to sustain the business during adversity and drive growth during challenging times? In short the people behind the target company can be the deal makers or deal breakers.
What is the politico-economic climate prevalent?
Is there a global slump a la 2008? Is there a travel embargo in the relevant market or markets as a result of an extraneous incident like a terrorist threat or attack? These factors play important roles in determining the investor preference in identifying viable businesses to invest in. On the other end of the continuum, businesses that invest in environment friendly technologies will attract Private equity.
What factors might impede growth of the target company?
Private Equity players should be alert to spot market trends and align them with the strategic aspirations of the target company. Often times, business owners keep a short term horizon when evaluating potential takeovers. In this way long term threats to the growth of the business are overlooked. An investor thinks medium to long term and always evaluates entry barriers, dynamic technologies which may make the business redundant. Conversely, some businesses may be well ahead of time and may not evince interest from the market in the current to medium term. Basically, the business has to be relevant with the market that is going to be served by it. While these are the basic parameters to be kept in mind while sizing up a potential target, it must also be kept in mind that there are several other specific factors that are relevant to different PE firms when they give their assent to financing a particular company.
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