Guide for entrepreneurs

Requirements for companies and private equity partners

How does the private equity partner recognize a suitable company for investment?

  • Management expertise as the basic condition for a forward-moving partnership in mutual confidence
  • Market potential leading to opportunities for growth
  • Products clearly stand out from the competition
  • Competitive position of a potential leader
  • Business plan plausibly sets out the sustainable development of the company
  • Timetable stipulates milestones for corporate development

How does an entrepreneur recognize a suitable private equity partner?

  • Basis of trust between the two parties
  • Willingness to take up minority or majority shareholdings
  • Independence from banks
  • Equity capital partner focus
  • Sufficient capital for follow-up financing
  • Exit targets and constraints
  • Entrepreneurial experience and contact’s attitude
  • Network of portfolio companies, investors and consultants
  • Speed of decision-making
  • Transparency of the capital provider
  • Nature and scope of support
  • References
  • Nature and scope of communication

What documentation does the private equity partner need from the company?

Aspects of company law and internal organizational structure

  • Legal structure of the group of companies and its investments
  • Structure of the group of shareholders
  • Internal organizational structure by business areas and functions

Products and markets

  • Overview of product lines, products, markets and market segments
  • Breakdown of the products/product lines into new, innovative and established, duration of presence on the market, product life-cycle
  • Estimation of marketability and strategies for the individual products/product lines
  • Structure of the sales organization and identification of the geographical sales markets
  • Development of sales to the ten main customers in the past three years
  • Importance of long-term customer relationships for commercial success
  • Statement of strategic dependencies
  • Description of possible substitute products from competitors
  • Positioning of the individual competitors by product groups
  • Description of the market position in relation to the competitors (benchmark)
  • Opportunities for the company (internal/external optimization)
  • Risks to the group of companies from technological change and economic developments
  • Integration of customers and suppliers

Employees

  • Development of the number of employees in the past three years
  • Numbers of employees in the individual business areas

External accounting

  • Annual financial statement of the company (including balance sheet, profit and loss account, explanatory notes and management report) and where available auditors’ reports for the last three business years, including any subsidiaries
  • Consolidated annual financial statements of the group and auditors’ reports for the last three business years

Internal reporting

  • Product and product line-related development of sales and contribution margins for the past three years
  • Documents on internal earnings analysis for the current business year, e.g. target/actual analyses on a monthly basis

Planning

  • Verifiable budget accounts for the coming three business years, broken down by business areas and products
  • Planning on the strategic orientation of the group of companies
  • Planning assumptions
  • Investment planning for the coming three business years
  • Details of human resources planning

The typical sequence of a search for equity capital

Initial contact

For reasons of time and cost, initial contact typically takes place by telephone, fax or email. A requirement profile can then be used to determine very rapidly whether the company seeking investment meets the expectations of the private equity partner, and vice versa.

Systematic selection and provision of documentation

For reasons of clarity and in order to save time for the analysts, the initial letter and the summary should cover the following issues which are relevant to the decision:

  • Congruence with the investment focus and requirement profile of the private equity partner
  • Success factors, unique characteristics and risks of the investment
  • Amount and probability of the expected yield
  • Exit opportunities
  • Plausibility of the information

Business plan

The business plan should provide an overview of the company seeking investment and contain the following:

  • Legal form of the company
  • Products and/or services
  • Industry and market situation
  • Marketing and sales
  • Portrait of the company management
  • Planning for the next three years (balance sheet, profit and loss account, investments, etc.)
  • Capital required

Letter of Intent (LOI)

Following a successful review of the documentation by the private equity partner, the two parties undertake in the LOI to continue discussions with the possible result of a contract. Together with the provisional purchase price, which can still be adjusted in the due diligence phase, the LOI contains information on the parties involved and the further procedure to be adopted.

Due Diligence

The Due Diligence is conducted by the private equity partner using both internal and external specialists. As a rule, it comprises the areas of Legal (review of legal circumstances), Financial (review of the balance sheet and profit and loss account), Market (review of the market and the industry) and Commercial (analysis of future potential) Due Diligence. The information obtained in this way is used by the private equity partner to estimate the strengths, weaknesses, opportunities and risks of an investment, finally leading to a valuation of the company.

Negotiations and implementation

Fundamental agreements set out in the LOI are ultimately incorporated in a contract. The purchase contract covers the purchase of shares, the articles of association, the rules of procedure for the advisory or supervisory board and those for the management, etc. When mutual agreement is reached, the contract is authenticated by a notary public.