Top 10 Signs of Private Equity Readiness

As private equity investors look for new businesses to acquire, their first selection screen will be against their firm’s unique investment criteria, including size (revenue and/or earnings), geography, and industry. For example, most PE firms avoid companies in volatile or cyclical industry sectors, such as technology, consumer/retail, and construction. Beyond this first round of screening, however, PE firms are almost universally looking for a common set of characteristics that indicate whether a given company is ready for a new equity capital partner.

Here are the top ten characteristics that private equity firms will want to see in their prospective acquisition candidates:

1. Solid, proven management team that will lead the company after the principal(s) exit
2. Significant and quantifiable opportunities for growth, organically and through acquisition
3. Five-year strategic projections and three-year look-back showing defensible margins, consistent growth, and prudent capital expenditures
4. Defensible market position in an attractive, sizeable, and growing industry sector
5. Clear customer value proposition and competitive advantages
6. Customer and supplier diversification (no account more than 25% of revenue or purchases)
7. Proven marketing ability to both external and internal audiences
8. Clean and assumable contracts and leases
9. Reliable reviewed or audited financials for at least three years from a reputable CPA firm
10. Professional set of daily flash reports and monthly and quarterly reporting packages.

If you are interested in partnering with private equity at some point in the future and didn’t score a perfect 10 of 10, don’t worry. There are several steps that business owners can take today to increase their attractiveness for future private equity investment, including:

• Conduct a strategic planning process to identify and prioritize needs to meet the readiness criteria above
• Bring in outside resources to rapidly make changes that facilitate achieving the strategic plan
• Review personnel and clean out the dead wood by asking: “Would you hire this person today?” Upgrade to the right talent with a sound recruiting process, and pay up for talent.
• Make all systems scalable: financial, operational, customer acquisition and retention, HR
• Delegate responsibilities and develop the next level of leaders to diminish reliance on the principal(s)
• Establish long-term incentives for key personnel
• Revisit and measure results against the strategic plan
• Have a good financial planner in place to create and execute a good plan post-closing
• Select an investment banker with deep experience and contacts in the PE market to help prepare the company for sale and execute a methodical, well-orchestrated sale process at the right time.

At Fahrenheit, we work with leaders to chart their ultimate destination, map out their options and navigate the best path forward, avoiding trouble spots along the way. Our approach provides seasoned, straight-talking business advisors who work as part of your team, consultants who tackle pressing issues and search experts who help you find the right people to work with you on your journey. Contact us today to learn more about the variety of services we offer.

About the Author

Jonathan Brabrand is a Managing Director at Fahrenheit. He is passionate about helping businesses prosper and maximize value to their employees, customers, communities, and owners. Instilled with a spirit of entrepreneurism from a young age, Jonathan draws on his experience as a business owner, trusted strategic advisor, and investment banker to identify and overcome the challenges clients face.