Being able to stand out from the pack is what gets a deal done
with a private equity (PE) firm.
First and foremost, PE firms are financial buyers that seek to
generate returns to their investors over a specific time horizon.
Historically, PE firms utilized financial structuring (i.e. debt
financing) to achieve their returns. As a result of increased
competition and the general lack of inventory of quality
opportunities, PE firms are increasingly focusing their attention
on generating returns from operational leverage. This has led to a
rise in industry-specific firms (i.e. focused only on one segment
such as food and beverage or consumer brands), whereby operating
partners with deep industry backgrounds are being employed to add
significant value to portfolio investments through a number of
growth strategies, for example, in expanding into new geographic
markets where experience is essential.
As such, private equity firms are focused on identifying the
right platform investments for the portfolio, and seek to
supplement these investments through additional synergistic
acquisitions that align with their growth strategies in an effort
to drive value. Generally these acquisitions can not only lead to
cost synergies, due to overhead consolidation and economies of
scale in buying power, but can also improve the potential exit
multiple or valuation on sale, due to the increased customer and
Given the changing environment, PE firms are looking for the
following characteristics in a platform investment:
Growth industry – favourable industry trends allow PE
firms to return above-market results and generate better returns
than their peers. When disruptive technology or changing
demographics, for example, lead to a significant opportunity,
private equity firms are keen to invest or acquire at favourable
valuations. In addition, companies in industries that demonstrate
defensive characteristics during downturns, such as healthcare and
food, are always high on the list of targets for PE firms.
A sustainable competitive advantage – this may seem
obvious, but strong investment targets include companies that are
market leaders (or one of the leaders) with high barriers to entry
(from a cost or technology perspective) and strong customer
relationships. When intellectual property can be used to defend a
market position, interest from PE firms increase.
A balanced and diverse growth strategy – it is imperative
that a company's success is not completely reliant on one
driver. This could include: growth through the introduction of new
products; increasing the number of locations; new customers;
increasing the penetration of current customers (upselling
products); exploring adjacent industries; and expanding into new
geographies. In addition, having an area where PE firms can add
value (for instance, by improving systems and reporting, or through
process efficiencies or synergies with existing portfolio
companies), increases the interest of PE buyers.
Recurrence of cash flows – recurring revenue leads to
recurring cash flow, which will allow PE buyers to increase
leverage and, hence, their potential returns without taking
Low capital expenditure – allows for more flexibility to
reduce debt, invest to expand or return capital to the
Management – strong management teams that have a proven
track record delivering on growth initiatives are key. For
instance, if an owner is seeking to exit, having a professional
management team in place that has the relationships with the
customers and suppliers, such that disruption does not occur, will
lead to an increase in valuation and reduce a potential
post-transaction retention or earn-out period.
While each PE firm has its specific criteria, and there are
funds that focus on turnaround and restructuring opportunities,
these characteristics are generally the initial areas of review
when considering an acquisition or investment.
With the current credit markets, where the banks are open to
providing capital to proven PE firms, the opportunity for a company
that demonstrates these characteristics to realize a strong
valuation is present.
PE firms are disciplined buyers of businesses, and they review
and perform diligence on many prospects before making acquisition
decisions. Ultimately, a lot of these opportunities are rejected.
So, when discussing a potential transaction with a PE firm, the key
to maximizing interest (and hence valuation), is to focus on
addressing these points in a manner that shows sustainability going
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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