Five things private equity firms look for in companies



Private equity firms do not invest in companies blindly, nor do they spend with simple criteria in mind. They look for concrete things to decide if the company is worth the investment.

If you consider that more than 50% of these investment deals are between $50 million and $1 billion in value, it becomes clear why extensive research and careful deliberation on the company’s value matters. Besides; private equity firms

  • Increase the value of their investments
  • Help fuel growth of these companies
  • Achieve high returns on their investment

That points to the importance of these investments for both sides.

There are numerous things that every good private equity company looks for in growth companies, but only a handful are considered vital. After careful research, we’ve found that there are only five essential things that each private equity firm looks for in a company they want to buy into.

Whether you represent a private equity firm or a growth company that is trying to increase its value and to obtains a sizable investment, this article will benefit you. It will inform on several important things in the investment business that you may not already know.

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Good management teams

One of the first and most important things every great private equity firm looks for in the companies they want to invest in is a good management team. Unless they want to change the managers, top quality managers are a decisive factor. The investment company is not going to run day-to-day business for every one of their investments, which is why they want them to have high-quality management teams.

Private equity firms need the company they are investing in to have management teams that can flawlessly perform the following things:

  • Know how to and succeed in transforming their company’s business model to correctly reflect the consumer and business wants and needs from their service.
  • Change the company’s structure if necessary to create efficiency and cut down on costs.
  • Continue to grow through sales motion, which includes alliances, new joint ventures, and customers.

What all of this means is that private equity investors need the management teams to be among the best, completely agile, and able to execute changes whenever necessary and yet further the company’s growth.

1. An ambitious yet realistic business plan

The main idea behind the need for investment is further growth. There is no point in buying a company that’s not planning to do whatever it can to grow. In turn, it necessitates a sound business plan that has to be both ambitious yet bound in the realities of the current market and the company’s abilities.

Naturally, this business plan has to:

  • Properly envision sales growth
  • Predict profit growth with a reasonable margin of error
  • Back everything up with hard facts
  • Be coherent

Besides this, for the business plan to be successful, it has to:

  • Be as unique as the company itself
  • Have a strong value statement
  • Place equal importance on the short and long-term plans
  • Take into account the allies and opponents on the market
  • Plan for uncertain and hardly predictable things

2. Potential for growth

One might think that the potential for growth is the first and the only thing an investment firm would look for in the companies they want to invest in, but in fact, it’s only one of the few main things.

Yes, private equity firms do look for the potential that includes several things, but they also rely on their gut feeling, or they do not measure the risk of their investment. It was thought to have been reserved only for venture capitalists who usually invest in new companies and startups where everything is a risk, while regular private equity firms look for more security. Unfortunately, they too often act like venture capitalists who are a risk that might be worthwhile but is also unnecessary.

We believe in growth, which is why our advice is to look for several key factors that indicate the potential for growth:

  • The positive state of industry the target company is in
  • Positive state of industry the target company is in
  • Sufficient size of the market
  • The openness of the leadership
  • Past successes
  • Stable customer base

It’s also worth mentioning that none of this indicates the certainty of growth, but it does show the high probability of growth, which is more than enough.

It’s also worth mentioning that none of this indicates the certainty of growth, but it does show the high probability of growth, which is more than enough.

It’s also worth mentioning that none of this indicates the certainty of growth, but it does show the high probability of growth, which is more than enough.

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3. Quality of research and development

Every company’s success depends on their willingness and ability to conduct research and further their development. That’s why private equities always check if the company effectively communicates their research and development plan and whether or not it shows potential.

In today’s market, out of the companies in all industries; healthcare and technology companies are the ones who need to have a sound research and development plan, as these are the critical indicators of success for their respective industries.

Private equity firms consider the following things when it comes to research and development:

  • How the target company’s research and development plan compares to other companies on the market and whether or not it can compete effectively.
  • The target company is expected to know the right amount of money that needs investment in development and research that will drive revenues and further growth.

4. Security

Last but not least, security is another main criteria for private equities. As they are not banks, they cannot know their whole return on investment, nor that there will be one at all. That’s why private equity firms look for several things that will bring them security:

  • Seats on the board of the company to have a say in many vital matters
  • A sound contingency plan as every business has its ups and downs
  • Financial visibility with transparent and accurate reportingA prepared and clear exit strategy to implement after a few years when it’s time to sell

All in all, we believe that this sufficiently explains why these are the central criteria for private equities before they invest in companies. It’s crucial for both sides for these five things to exist as they indicate more growth and revenues for both.

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