Most businesses looking for external funding will typically use some form of debt or bank product. At the simplest level, and for the vast majority of UK businesses, this will be in the form of credit cards, overdrafts or mortgages. As they grow in size, a wider range of options may become available to businesses, including term loans, revolving facilities and leverage finance products.
Equity funding also provides a range of other options that should be considered, though it is not suitable in all cases. For start-up and early stage businesses, development or venture capital can help fund early growth including R&D, product development and testing, commercial trials and setting up operations etc. Once businesses start to establish a track record of growth, profitability and cash generation, private equity funding can help to further drive growth and expansion.
Often the funding will be used to invest in new facilities, new products, expansion into new markets or overseas, hiring more staff or rolling out stores or outlets. Succession planning, particularly in family and owner managed businesses can often be facilitated through private equity investment as individual shareholdings can be bought out to enable retirement or a buy-out of the business.
Private equity investors
A private equity investor can bring a number of benefits besides just the availability of new funding. Where an investor knows a sector well, they will be able to introduce individuals with strong operational or non-executive skills and experience, supporting both the day-to-day running of the business and it’s wider strategic planning.
In many cases investors can help to further professionalise a business, bringing with them increased rigour and disciplines, such as control over margins, management of cashflow, improved reporting and KPIs. Not all businesses will need this, but private equity investors can also help attract high quality management and staff from either competitors or elsewhere who see a greater opportunity for growth, further expansion and ultimately a successful exit. This does not come without some additional costs and risks however.
Raising private equity funding can be a distraction, often a detailed due diligence process will be required and there will be costs involved with this and in arranging the funding. Detailed financial and operational reporting is likely to become a focus and financial covenants may well be put in place to help monitor financial performance.
Investors are likely to be reasonably hands off regarding day-to-day operations, but will have a strong focus on performance, growth and strategy. This may include areas such as expanding overseas, lease or buy decisions, acquisitions and disposals etc. It is important that business owners and shareholders spend time to fully understand both their own objectives and how they like to do things and those of any incoming investor. In particular, they should understand an investor’s approach in terms of how long they invest for, availability of further funding etc. referencing with management teams at other portfolio companies of that investor can be particularly helpful here as can speaking to advisors and lawyers within the local corporate finance community.
Advisors will be able to help prepare business plans, structure potential funding and to identify relevant investors. Working with lawyers who are experienced in these type of transactions is also really important. These advisors or lawyers may appear as an additional cost or complication, however, their advice and input can be invaluable both financially and also in avoiding delays and allowing management to focus more on the operations of the business.
Craig is an investment director at Maven Capital Partners. He currently heads up the Greater Manchester Loan Fund and is responsible for Private Equity and Regional Fund investments across the North of England.
February 13th, 2018