Identifying a potential private equity investment target and strategically implemented the acquisition requires an incredible amount of experience. Seamlessly integrating two different commercial entities is a challenging process and has to be implemented with meticulous attention to detail. The very term corporate buyout induces admiration as your business will need to be in a strong position in order to successfully buyout another commercial entity.
Over the past decade, the number of private acquisitions have increased at an alarming rate as the global value of private buyouts is now in billions. Despite the fact that the private equity environment is becoming more challenging due to Government sanctions and rising interest rates, this investment criteria tends to invoke greater returns in many different aspects. Generally speaking, private equity investment portfolios are mostly attributed to high net worth individuals, a large group of institutional investors and a group of accredited investors.
This type of investment involves an enormous amount of capital and is often done to generate returns or to gain a significant level of control over another business. The amount of capital required for the acquisition varies in each investment, some could simply cost thousands of dollars while others could be in millions. It all depends on the investment target and the goal behind the integration, the underlining motivation or goal behind the investment defines the structure of the acquisition. However, finding the right investment target requires impeccable understanding of acquisitions and the context of the deal. For this purpose we have articulated a list of factors you should consider when identifying private equity investment targets. These factors are as follows,
Willingness of the Management to Sell
If you are aiming for a hostile takeover then you might not need to consider this factor but we would definitely recommend taking this issue into perspective. If you are gearing for a hostile takeover you should make sure all of the relevant information is disclosed during the merger agreement and that the business does not have hidden liabilities which can cause problems in the future.
Additionally, due to the hostile nature of the takeover, you will also lose out on loyal employees who are crucial to the company. So make sure you consider these factors before investing in a hostile takeover and if you are looking for a normal acquisition then consider the willingness of the management as a prerequisite. Even if you plan to ruthlessly restructure the business, the willingness of the management will play a huge role in how the merger is implemented and the immediate aftermath.
Current Operating Cash Flow
If you are having trouble with your current operating cash flow then a merger or any sort of acquisition can cause a lot of hindrances. Every corporate buyout will require a substantial amount of capital and a high cash inflow. Once the merger is complete, your company will have to pay off debt fees. As a private equity buyer you will need to maintain a stable cash flow in order to pay off all the costs of the corporate buyout or make sure that your corporate buyout will not make you burn through cash. So make sure you consider your current financial standing before initiating the corporate buyout as you might need additional capital injections to successfully cover all of the hidden costs which might accrue after the acquisition is complete.
Efficiency of The Business
Another profound factor which you should take into consideration is whether the potential business has the capacity of providing substantial returns which cover your investment. Once the corporate buyout is complete, your management will have to devise strategies which identify and eliminate any inefficiencies of the business. Your management team will need to analyze the business from every aspect and instill strategies which will help stabilize the profits generated by the business. Before you initiate the company buyout you will need to identify different aspects of the business which you can improve to produce higher returns. Investing in a failing business has the capacity of ruining your current operations as well.
Current State of Their Balance Sheet
As you may already know the core fundamentals of the business play a crucial role in the corporate buyout. Your private equity team should thoroughly inspect core financial statements such as the balance sheet. It is important to understand that there are legit ways of dressing a balance statement so make sure your financial team is well versed in these tactics. It is important to understand that it is not every day that a business owner agrees to sell their stake in a commercial venture. This is exactly why it is so important to evaluate each financial document with meticulous attention to detail. Your private equity team should draft their own statements according to all of the data provided by the potential business before continuing with the corporate buyout.
Tax, Regulatory, Legal Constraints
Due to the high profile nature of acquisitions and mergers, there are many legalities which come into play. You will need to evaluate your corporate buyout from a legal and tax standpoints. In most cases the best solution is to hire a professional who has experience in dealing with acquisition regulation and taxes. Please take this very seriously as you can end up spending thousands of dollars simply paying taxes or paying for penalties. If you are acquiring a foreign company it is absolutely necessary to adhere to their legalities and regulations. You will need to learn local how the local Government operates and what legalities affect the general operation of your enterprise.
At the end of the day any type of private equity buyout will require a lot of consideration as one mistake could cost you. There are thousands of investors out there who pooled all of their capital towards a single equity buyout which turned out to be a failure. So make sure you consider the aforementioned factors when determining private equity investment targets.