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PRIVATE EQUITY | BDO LLP
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BALANCING REALISM AND AMBITION: The medium- term financial forecasts of your
tech business are fundamental to a PE firm’s appetite to invest. These forecasts articulate the business’ future growth strategy and anticipated returns for shareholders. Mistakes tech businesses often make include: • Over-cautious forecasts – management teams often believe that over-cautious forecasts will be viewed favourably by PE investors. They present unexciting growth rates and leave themselves scope to over-perform. The issue here is that unambitious forecasts, and their potential returns, will not attract investors. • Over-ambitious forecasts – the desire to excite an investor can lead to aggressive forecasting. If you anticipate tenfold increases in profit over four years, for example, this will lack credibility. TIP. Find a middle ground where your forecasts are positive but will stand up to the scrutiny of any due diligence.
PITCHING TO PE: FIVE MISTAKES TO AVOID The prospect of raising PE investment for your tech business can be both exciting and daunting, even for an experienced management team. You need months of preparation – developing a credible growth story, creating an engaging investor pitch book and readying the business for intense scrutiny. All this hard work can be undone if you make an avoidable mistake in your pitch. Here are the top five mistakes tech businesses make when pitching to PE firms, and how to avoid them:
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SKIN IN THE GAME: When you as the management team already hold some equity in the business,
a conflict can arise as you are effectively wearing two hats. You are both sellers looking to maximise the price for the equity, and buyers who want upside from the shares held in the business going forward. Any deal with a PE firm will involve selling some of the equity and re-investing the remainder into the new deal. This is commonly referred to as a ‘money out’ or ‘shareholder realisation’. For this reason, PE investors will always want you to have significant ‘skin in the game’; they need you to be as focused on generating future returns as they are. TIP. When pitching, try not to place too much emphasis on the cash realisation element of the deal. This will be a red flag for many investors as it suggests that future growth is less important to you.
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