Think like a private investor

Tuesday, June 30, 2009

Q. How would I prepare a strategic plan for a private equity investor interested in my company?


A. Private equity investors assess every deal based on time and return - how large of a return can be gained in the least amount of time? 

Before preparing your plan, remember that private equity firms are funded by larger institutional investors like pension funds, which expect above-market returns and full repayment of their investment within 10 years of initial funding. A private equity firm only makes money after its investors generate a minimum annualized rate of return (normally 8% to 12%). 

As a result, private equity looks for deals where the seller is undervalued but has potential to provide significant returns within a three- to seven-year period. In order to maximize its chances of reaching these goals, private equity generally takes a majority position in a company and asks existing management to remain as a minority shareholder.

For these reasons, the primary motive of private equity investors is pursuing an aggressive growth and acquisition strategy. If this is the goal, your strategic plan will focus on explaining why bigger can be better. Areas like cost synergies, improved utilization and access to long-term customer contracts need to be fully explained and validated, as will a detailed assessment of your target geographical market, including the number of potential acquisition candidates and their willingness to sell.

Of course, even if a private equity investor is not right for you, adopting its philosophy may still make sense. What is the minimum acceptable annualized rate of return for your business? How can you achieve this return over the next three to seven years? Focus on both cost reductions and possible growth opportunities. 

Think of it like a golf lesson: You may need to do things differently in order to improve your overall game. 

Don Davis is an industry consultant who focuses on business and strategic planning, financial and operational management, and mentoring. He can be reached at