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  • Know what PE Firms are looking for – and at

Know what PE Firms are looking for – and at

Traditionally, PE firms have a set goal for an investment, which is that it should deliver a substantial return in three to five years. Often, the goal is to either double an investment in three years or see it treble within five years. 

A time-constrained, returns-based approach to M&A means that PE firms are interested in identifying if your company, for example, has high growth potential or if efficiencies or bolt-on acquisitions can markedly increase your short to medium term profitability.

Software companies need to be aware of the focus on growth and create detailed plans and strategies for how such short to medium-term goals can be realised without jeopardising long-term growth and the future vision for the company. Reaching a constructive agreement with the PE firm on such plans is crucial.

During negotiations, PE firms will, amongst other areas, be focused on:

  • Technology: Including your products, services, technology, intellectual property and R&D. IP rights and future potential in a rapidly changing market will be two key areas that PE firms will pay extra attention to during negotiations. 
  • Management/employees: The PE firm is focused on management and employees’ ability to deliver on business strategy, overcome challenges, create new solutions and grow the business. Documenting your track record of reaching set targets will also be crucial.
  • Succession planning: Whether your company have a pipeline of talent and a complimentary strategy in place for replacing key employees if they retire or leave the company.
  • Contingency plans: Every industry and individual business goes through ups and downs. Specific clauses regulating what happens in case of market changes, and govern the decision process in such cases, will be mapped out by the PE firm.
  • Market trends: Where the market and sub-industry you are part of is headed – both on a macro and micro level. Changing customer demands, new technological developments and similar trends all have the potential to benefit or threaten your market position and service portfolio. 
  • Cash flow: Documenting recurring cash flow and ability to expand sales to both new and existing customers can go a long way towards securing a PE deal. 
  • Investments: What you are going to be using the money from the deal for and how it helps you achieve growth.
  • Exit strategy: What happens with the company, and funds raised, through a future sale or IPO. 

Prior to negotiations, PE firms will have mapped out their take on various aspects of your company and used it to form an outline of deal terms. Carrying out a similar process and preparing your own arguments – based on detailed data and documents to support them - will give you a much stronger starting position for negotiations and help speed up the negotiation process.