Many of the world’s most successful companies rely on their founder’s entrepreneurial spirit, ambition, and investment.
However, there may come a time when outside capital is needed to finance further expansionary growth, execute a full or partial exit for owners, or optimize their capital structure. A business faces three major considerations when selecting an appropriate source of finance:
- What is the business looking to achieve with the investment monies?
- How much investment is required?
- Which external sources should it be raised from and in which form (debt or equity)?
Many successful businesses looking to accelerate growth arrive at this crossroad and, while access to finance may not be a challenge, identifying the right partner to work with can be.
Following on from Demystifying private equity, we provide a road map for this complex and time intensive investment process.
Step 1: Understanding Canada’s private equity universe
For private companies seeking to grow their business, the dilemma of choice can make the first step of identifying potential investors complex. It’s essential that your advisors work closely with you to understand your aspirations and to help navigate you to the right private equity vehicle.
Below, we illustrate the universe of available private equity (PE) investors in Canada.
- Seed or early stage, often specializing in certain industry sectors such as technology or healthcare.
- A minority investor, backing a management team and the development of valued intellectual property.
- Investment office of one or more high-net-worth individual(s) and their family. Focus is on diversification and reinvestment of wealth into a range of asset classes, which frequently includes private equity investments.
- It acts as both an active and passive investor via majority and minority stakes in multiple businesses that are typically held for a longer period than other institutional investors. Often focused on investment in sectors and businesses familiar to the underlying family.
- Active core of PE funds seeking transactions with a broad range of enterprise values in Canada.
- They focus on deploying target levels of investment capital per deal in attractive businesses and will require control.
- A subset of the mid-market, these investors are focused on the acquisition of a single business into which they will step in and operate as a majority investor.
- Facilitate a transaction where an owner is looking to ensure success of management.
- Seeking to transform suboptimal or underperforming businesses, which will typically be acquired at lower valuations.
- They use operating partners to deliver transformational change, often including enhancement of management teams.
Step 2: Building the business plan
Producing a compelling business plan to immediately grab and retain the attention of a potential investor is a critical element of a successful PE deal.
Here the key questions that you should consider:
Planning the investment process
Entering a PE investment is exciting but time-consuming. Below is a high-level overview of a typical investment process and timeline.
Phase 1: Exit readiness
First 1-2 months
Goals
- Obtain stakeholder buy-in
- Early preparation and identification of deal issues
- Assess all funding options
Preparation optimizes future value
- Build and develop the three- to five-year business plan model
- Assess incumbent management team’s ability and identify gaps
- Plan to optimize trading and working capital performance
- Assess business systems and fitness to deliver the right financial and operational information
- Consider the existing financial structure, flexibility, and implications of a deal
- Consider the impact of any judgmental accounting policies
- Early assessment and planning for tax implications of a deal for key stakeholders
Phase 2: Preparation
Next 1-2 months
Goals
- Agree on deal approach and timetable
- Identify risks and plan mitigation
- Prepare deal materials
Focus on value drivers and ensure quality of information
- Complete the business plan and supporting financial model that tells the investment and growth story
- Prepare the information memorandum and other supporting sales materials
- Compile and carefully assess supporting financial and operational information
- Securely catalogue and host data in a logical and accessible online data room format
- Formalize timetable and approach, draft process letter
- Prepare shareholder consents and obtain approval of the suggested timetable
- Complete statutory audits, health and safety, taxes, and other core assessments in good time
- Consider use of an independent vendor due diligence (VDD) report to support the sales process
Phase 3: Marketing
Next 3-4 months
Goals
- Stimulate the PE audience
- Drive competitive tension
- Obtain offers
Launch the sales process, market the business and secure offers
- Issue teaser and secure interest under a non-disclosure confidentiality agreement
- Active discussion and positioning of the investment opportunity with PE firms
- Measure and manage interest to deliver non-binding PE offers
- Shortlist parties and provide additional access to management and materials
- Coordinate and deliver management presentations to potential buyers
- Respond to questions and queries arising from the information memorandum and other materials, including potential vendor and commercial due diligence
- Manage potential buyers’ advisors
- Secure funded offers from PE firms
Phase 4: Deal completion
Next 2-4 months
Goals
- Agree on deal approach and timetable
- Identify risks and plan mitigation
Focus on value drivers and ensure quality of information
- Determine preferable offers and complete final assessment with stakeholders
- Choose successful PE investor and manage other potential investors
- Negotiate to completion of sale and purchase agreement considering the following:
- Price/consideration and timing
- Terms
- Representations, warranties, and seller disclosures
- Closing mechanism and any post-deal adjustments
- Complete equity deal and service contracts for new management
- Deal closing and any associated conditionality or clearances required
- Plan for the first 100 days under PE ownership
How we can help
The reasons for embarking on private equity investment may be complex, but whatever your motivation, our Private Equity group can deliver practical solutions for your business. This practical team has a profound understanding of the private equity industry, particularly in the Canadian mid-market space. Our people are part of the process at every level, interacting with funds, advising on deals, and working closely with portfolio companies to help them realize their goals.
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