Businesses and companies always seek capital infusion for their business at one point or another. In recent times, the number of ways companies can raise funds for their business is increasing. Private equity funding is an option for raising funds that have become helpful in scaling up your business. The funds are useful to test new markets, exit for a good sum of money in the feature. They also acquire other entities, and/or use the capital to meet other business goals.
While this sounds good, getting private equity funding can be a problem compared to other sources. The question is, does your business have what it takes to get private equity funding? Here are 5 key points that will get you the private equity funding needed to scale up your business.
Strong management Team
One thing you should keep at the back of your mind is that the private equity funder will not be into the daily management of your business. As such, they need to be rest assured that you have sponsors, mentors, and management teams that are capable of advancing the course of the business, able to attract talent, resilient and can embrace innovations. Above all, the management team needs to have a track record that shows the strength, resilience, and capability of the team to deliver growth and profitability. If the investor is not comfortable with the team, there is a high possibility the business won’t get the private equity funding.
Ability to scale up the business fast
The reason a private equity firm will invest in your business is that they look for a significant return on investment (ROI). They wish to have this ROI in the fastest time possible. The ability of your business to scale up quickly within the short period (3 – 7 years) could mean you are getting private equity funding. This involves knowing how market share is related to the size of the industry, and how well your business is positioned by leveraging technology, better strategies, and quality relationships to increase its market share.
Market position and competitive advantage
This point is so important that most investors will only pick candidates or businesses with a strong market position and a sustainable competitive advantage. Investors want to fund companies that are market leaders and are capable of showing the following:
- High barriers to entry
- High switching costs
- Strong and sustainable customer relationships
Show these characteristics to a private equity firm, and you are on your way to getting funding for your company or business.
Stable cash-flow and excellent business plan
Firstly, you must have a business plan that is realistic. The plan should also have all the facts to back up the needs of the market. Your business plan must also identify the critical factors to scale the business, the strengths and weaknesses of the business, and the competition. Finally, private equity firms need to be convinced that your business has a stable and recurring cash flow. The reason for this is that – they need to be certain you have enough cash flow to service all debt requirements. This means
- Little or no seasonal fluctuations in cash flow
- Relative immunity to economic downturns and commodity prices
- Good customer revenue cycle
- High customer lifetime value
- Relative low impact on price changes
- Attractive EBITDA ()earnings before tax, interest, depreciation, and amortization.
Exit strategy for private equity funding
You must note that most private equity funds will only invest for some years. These funds also expect an exit on their investment. This, therefore, means that your company and its management team must have a clear approach to exit. You must have a strategy for an exit for the funds after the investment period. Your ability to show that you can deliver on your goal could mean you are getting Private Equity funding. Also, your ability to create a route for exit helps in getting PE funds. Most private equity funds will want to either liquidate through massive sales or by IPO. They would only give in their funds if they are convinced there is a coherent exit strategy. This exit strategy is incorporated by the company and the management team.
Conclusion of Private Equity Funding
In conclusion, getting private equity funding will require you to be a lot more open about the past, the present, and the future as it relates to the business. Sometimes, the process involved may extend into long periods of due diligence. Also, it involves a thorough evaluation of the business, but the result is rewarding.
ALCOR is your best bet when it comes to preparing for private equity funding. We give guidance to our clients, taking them through the complexity of private equity funding. With our experienced Harvard graduate team, getting PE funding becomes a walk in the park.