11 PAUL MORRIS: DEMYSTIFYING PRIVATE EQUITY – AN INSIDER’SVIEW
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CONCLUSION
COMPETITION, WHAT COMPETITION?
You have existing and potential competitors, whether you know them or not. If you operate in the kind of large and growing market that PE firms prefer to invest in, that competition may well be very strong.
Don’t let the hard work you have put into preparing your business for PE investment be undermined by these five simple and avoidable mistakes. You should understand and be able to articulate; X Your desire for a stake in the business X The realism of your forecasts X Your market and your competition X How your business meets a need X How meeting that need drives profit Do these things and your chances of getting a successful PE deal will increase significantly.
Investors will always want a proper analysis of your key competitors and their strengths and weaknesses. Investors will need to know how this competition might impact the potential of your business. Dismissing the competition will not be viewed favourably by an investor.
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WHAT’S THE PROBLEMAND HOWWILL YOU SOLVE IT?
What is the problem faced by people or businesses and how do your products and services solve that problem? This is your business proposition.
Investors recognise that your business may be able to grow to a certain size by meeting customer needs opportunistically. However, this reactive approach will not enable your business to reliably scale to being two or three times larger than it currently is. Crucially it is this growth profile that investors will look for. Investors also have an increasing desire to back businesses which utilise technology to improve internal processes and/or enhance customer experience. The technology deployed does not necessarily have to be developed in house. The adoption of third party technology to drive competitive advantage is highly attractive to investors. You must be able to articulate your business proposition; how providing a solution to a problem will win you new business and enable your business to grow. You will struggle to secure PE investment without this key part of the story.
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HOWANDWHERE DO YOU MAKE YOUR MONEY?
Investors are initially attracted to businesses with growing profitability. But for this initial attraction to last and result in a deal, the investor will want to understand exactly how these
profits are produced. Typically, they will want to know how much profit comes from each product and service line, establish the profitability of each customer and how repeatable are the profits? Understand that if you are not able to explain how profits are made and will continue to be made, investors will end discussions quite rapidly.
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