Fitzgerald Power

Mapping prospective buyers, carrying out robust internal diligence, and strengthening management teams does not mean you’re about to sell your business, but it will help you make it more resilient today – and more attractive tomorrow.

The development of the Irish private-equity market has helped to professionalise SMEs. There is more rigour and ambition in SME boardrooms these days, with greater focus on growth and well-managed exits.

Private-equity (PE) firms start planning their exit before they invest in a business. Following an investment, they work with management teams to build shareholder value in a very deliberate manner, while keeping one eye trained on the exit door.

Here’s what SME owners and management teams can learn from private equity.

Map the universe of potential buyers

A PE investment paper will include a detailed analysis of domestic and international parties that might be interested in acquiring the target business. These parties will be organised into trade players and private-equity-backed platforms – or indeed PE firms without a platform that have expressed an interest in the sector in question.

When mapping the universe of potential buyers, SME owners and management teams, too, should consider the factors that will make their business attractive to potential suitors.

This analysis should include strategic fit and market position, quality and scalability of operations, financial performance, and growth potential.

A founder I work with started a company with the goal of selling it to LVMH. The point is not that he will only sell to the Paris-based, luxury-goods conglomerate. Rather, the point is that when the business is brought to the market, it will be so attractive that a counterparty as discerning as LVMH’s CEO Bernard Arnault would want to buy it.

Conduct full internal due diligence

When assessing an investment opportunity, PE firms will consider factors such as revenue quality and recurring income, profitability and margin strength, customer concentration, historic growth rates and future expansion potential, cash conversion and working capital efficiency, intellectual property defensibility, and management depth and governance.

These firms will carry out robust due diligence and set clear performance expectations, supported by a sophisticated financial model that will assess returns under base, management, and upside case assumptions.

This process doesn’t stop once the cheque is written. The most diligent PE firms will continue to interrogate and refine their thesis throughout the life cycle of the investment, often asking if the business can deliver returns beyond the original goal. If certain revenue streams have become unattractive or unprofitable, they will be eliminated as part of this process.

SME shareholders can take this outside-in approach, assessing the fundamentals of their company and its growth potential. This exercise can be undertaken by internal teams and supported by external advisors as required.

The output might be an abridged vendor due-diligence report, or an internal investment thesis that outlines why an investor or a trade player would acquire the company, and the levers they could pull to drive return on investment over a three-to-five-year period.

This is an exercise we undertook before raising equity for our accountancy firm Fitzgerald Power. The high-net worth investors we selected are long-term holders, and our intention isn’t to sell the company. However, we needed to demonstrate a credible value-accretion plan to attract the individuals we wanted.

Build a fit-for-purpose management team

While PE firms have sector preferences and businesses they like, they back management teams that align with their value-accretion thesis.

I spoke to a senior strategy analyst last week who monitors high-performing, listed companies in developing international markets. The companies that buck macro trends and use economic headwinds to their advantage have management teams that my colleague describes as “islands of excellence in a sea of chaos”.

The macro-economic landscape in Ireland is generally more favourable but you get the point. Excellent management teams can turn challenging trading conditions into catalysts for disciplined growth and long-term value creation. If you match a strong market opportunity with a high-quality team, you have created conditions where exceptional success is possible.

But it is about more than just quality. I have seen instances where investors were prisoners to key-person dependency risks, which thankfully never materialised. Leadership depth is also required. This isn’t just about the C-suite but also the tiers below.

Alex Ferguson had a policy of not allowing his teams to grow old together, balancing veteran experience with youthful energy. His approach was borrowed from the Matt Busby school of talent development – if you’re good enough, you’re old enough.

Depth and quality will only get you so far. Alignment is also required. Clear objectives, transparent reward mechanisms, and meaningful equity participation help align individual ambition with shareholder-value creation. The best PE firms use these tools to attract and retain top talent, and to drive a culture of accountability, momentum and shared ownership.

A blueprint for value creation

The discipline that private-equity firms bring to exit planning and shareholder-value creation offers a blueprint for ambitious SMEs. By mapping prospective buyers, carrying out robust internal diligence, and building aligned, high-performing management teams, SME owners can create businesses that are more resilient today and more attractive tomorrow.