The journey of an entrepreneur is often fueled by the short term desire to create something for themselves, but more longer term for the ambition to generate wealth.
The SME owner accepts a greater deal of risk than the employee for the opportunity to transform their idea into a successful business and reap the rewards.
A key ingredient for this transformation is growth, which often requires an injection of capital along with experience and expertise in many different business functions. Some SMEs manage this organically, but one common way to supercharge your SME’s growth is through primary investment from a Private Equity House.
As advisors to accomplished owner/founder business leaders, Rowan works to define and drive a value creation plan, identifying the required business milestones – such as primary investment – as one of its key targets.
It’s important to understand that while Private Equity houses provide opportunity, they have rigorous standards, both qualitative and quantitative, that must be met before they will provide an owner/founder with the cash injection that could be key to fulfilling their ambitions.
So, what does PE look for when considering whether to make an investment into an SME?
The Power of People
Have you surrounded yourself with the right people, with the expertise to drive growth in their business verticals? Or are you hesitant to ‘let go of the reigns’?
Owner/founders are usually driven, strong-willed individuals, and giving up some control can be difficult.
But the truth is, nobody can scale a business on their own, and if an owner can recognise this and adapt, private equity typically sees it as a strength, not a weakness.
The team you surround yourself with also needs to have credibility; evidenced by a track record of doing what they said they’d do.
Accepting a PE investment usually means adding to your team too; a Director from the PE House will often sit on the board and have a say in key business decisions, so it’s essential that there is alignment with that founder and the existing senior leadership team (SLT). And whilst PE is there to support, it is also there to challenge. Often the standards and rigour required by a Private Equity house are higher than in a business that hasn’t taken on investment, and this can affect operations, people, finance and other business verticals.
The business and the investor need to be aligned when it comes to the direction of the business and the eventual Exit. Whilst a business needs to remain agile as invariably things do change, if the business and the investment team are operating as a team, you will have the best chance of success.
One of Rowan’s PE clients is minority investor BGF
Pinesh Mehta is an Investment Director with whom Rowan has worked on several successful deals, including fulfilmentcrowd and Kids Planet.
Pinesh identified another key ability of the management team:
“Businesses that fail usually do so as a result of poor management, as opposed to bad market conditions. As long as we can answer the questions around ‘the people’ positively, we can still consider an investment if we feel that there is good potential within the business, and that the other factors mentioned can be improved over time.”
Rowan has an extensive Private Equity network and a strong track record of helping to both attract investment and facilitate the initial discussions between owner/founders and the PE house.
Our strength lies in our experience in appointing business leaders that effect the growth targets of the SME’s valuation creation plan.
“The ability of the management team to listen is key. We have a strong record track record of success in our minority investments and we’re there to advise from experience. We can see similar challenges in very different business, but we usually work through them via collaboration between ourselves and the Management team.”
The Promise of Opportunity
Typically an investor will try to answer the question:
“Is the business in an attractive market, and is the addressable market sufficiently large?”
A common misconception is that PE is looking for a potential market leader or a business with a truly unique offering. This isn’t necessarily true; it’s more important that the business operates in a growing marketplace, and is well-placed to claim a market share.
If you can demonstrate that your proposition works and the market it operates in is growing – there is a good chance that investors will show interest.
Investors gravitate toward enterprises with favorable gross margins, steady EBITDA, and a cash flow generating engine. The assurance of predictable earnings, punctuated by timely debtor payments, is instrumental.
This can take different forms; such as the monthly recurring revenue in a SaaS business, a robust order book or the tangible evidence of web traffic and conversion rates evidenced in an e-commerce SME
The Art of the Exit Strategy
Private Equity typically doesn’t enter every investment for an immediate Exit, but it does look to maximise shareholder value. This means that when the time comes for an Exit, it is an attractive proposition for the buyer, whether that be trade sale or secondary PE investment. Essentially, a potential investor just wants to understand whether the business will be attractive to another party in the future, and what steps are needed to take it to that point.
Sounds like a lot! What if I’m not quite there yet?
It’s worth noting that few potential SMEs – if any – have all of these elements in place when PE first takes an interest. In reality, ‘perfect’ doesn’t exist and every investment represents a calculated risk – but having the right people in place will go a long way to helping you achieve that first investment.
Pinesh continued:
“Businesses that fail usually do so as a result of poor management, as opposed to bad market conditions. As long as we can answer the questions around ‘the people’ positively, we can still consider an investment if we feel that there is good potential within the business, and that the other factors mentioned can be improved over time.”
Rowan has an extensive Private Equity network and a strong track record of helping to both attract investment and facilitate the initial discussions between owner/founders and the PE house.
Our strength lies in our experience in appointing business leaders that effect the growth targets of the SME’s valuation creation plan.
