Considerations for the team

Key considerations a Private Equity firm would need to take into consideration include:

Founding shareholder/s:

Full exit

  • Large element of cash received on day one
  • Reduce risk - realise value on day one
  • Restrictive covenants for exiting shareholders
  • Aim to maximise day one cash through maximum valuation of the company
  • Maximum valuation - is a strategic trade sale going to achieve a greater value?

Partial exit

  • Dilution of shareholding and loss of control
  • Founder shareholder rights for good / bad leaver
  • De-risk through day one cash out and ring fenced value
  • Share of future upside through rolled over equity
  • Less cash out on day one due to element of value to be 'rolled over' going forward
  • Break down of rolled over value between loan notes and equity
  • Element of rolled over value ring fenced through loan notes or freezer shares

Management team:

  • Availability of other finance that has a lower cost
  • Management's confidence and belief of achieving the business plan
  • Distribution of sweet equity to new and existing members of the management team
  • Composition of new board and voting rights
  • Additions / gaps required to be filled to complete the management team
  • Appreciation of private equity restrictions:
    • good / bad leaver
    • covenants
    • swamping rights
    • drag rights
    • consent matters
  • Enough left in to incentivise the management team
  • Strength of second tier of management
  • New service agreements to be issued
  • Private equity transaction fees to be funded by Newco. Fee typically greater than £1 million
  • Less cash out than existing shareholders due to private equity house, working management to be incentivised to grow the value of the value of the business
  • Appointment and relationship with Investment Director and Chairman

Further reading