How can you protect your assets in private equity mergers and acquisitions? As these deals have grown larger and more frequent over recent years, investors have stumbled as often as they’ve succeeded. You don’t need to let this fact discourage you, but you should take it as a reminder that you need to start with a sound strategy.
Managed well, private equity M&A can lead to strong returns, but it’s important to understand how they work. Successful private equity firms will pursue deals that add value over a relatively short number of years. Then they’ll aim to sell before their returns diminish. There are plenty of potential pitfalls along the way, but you can generally avoid them by taking a clear-headed approach to the whole process.
The business structure for your private equity firm
At the outset, you’ll need to decide how to structure your private equity firm. Will you work with partners? Will you run it as a corporation or LLC? As with any business, your decision will affect your taxes and personal liability, as well as the firm’s independence and survivability.
Define your business strategy
What market or markets will you enter? How will you add value to the businesses in which you invest? Are you willing to accept the risks associated with rescuing distressed businesses with high potential? Or will you focus on adding synergy and operational efficiencies to businesses that are already turning a good profit? You’ll want a sense of the larger picture before you start filling in the pieces.
Assemble your team of experts
Managing even a single business acquisition can be extremely complicated. Planning and executing a series of strategic mergers and acquisitions is simply too much for any one person to handle alone. You’ll need a strong team of skilled professionals, including accountants, valuation experts, bankers and attorneys.
Perform your due diligence
Once you start targeting your acquisitions, you’ll need to perform your due diligence, and you’ll want to give yourself time to do this right. You want to understand the business and its industry. What challenges does it face? Where does it have room for improvement? How will its culture blend with those of the other businesses you’ve added to your portfolio? Experts often point to inadequate due diligence in the cases of failed M&A. Don’t let yourself join them.
Adding value post-acquisition
The lifespan for most private equity M&A runs from 2 to 7 years, which emphasizes the need to start improving your businesses as soon as you bring them onboard. In most cases, as you buy smaller companies, you’ll find room to streamline operations and clean up sloppy back office practices. You’ll want financial controls and good reports. The amount of work you’ll face at this step will depend largely on your business strategy, but the value you add here will lead directly toward your profits.
Your exit plan
The business decisions you make as a private equity investor should improve the businesses you buy, but it’s never your goal to hold onto those businesses and run them indefinitely. Your goal is to improve them, increase their value and sell them. Accordingly, the eventual sale is as important a part of the strategy as any other, and you’ll want to work ahead to negotiate with qualified buyers.
A unique opportunity to grow your money
It goes without saying that private equity mergers and acquisitions can offer good returns on your investment, but they can also offer a unique chance to shape the businesses or industries that interest you. The important things are that you enter the process with a clear vision of its beginning, middle and end and that you find the support you need to execute that vision.
