Business plan criteria and contents under private equity

The term ‘private equity’ (“PE”) is a generic expression for investments in equity securities in companies that are not listed on any public stock exchange. Generally, in the UK, this means shares in limited companies, although there are exceptions (such as so-called ‘vanity pics’), which are public limited companies that are not listed on any investment exchange but maintain plc status so that the term ‘plc’ may be used in the corporate name.

A PE firm is an investment manager which raises pools of capital, typically in the form of PE funds, to invest. These firms receive a periodic management fee for doing so and the share in the profits known as ‘carried interest’ from each of the PE funds it manages. Depending on the size of the fund, they are classified among Upper (>£500m), Mid (£50 – £500m) and Lower (<£50m).

There are different types of PE transactions, such as Management buyouts, Management buy-ins, Leveraged buyouts, Institutional buyouts, Venture Capital, Growth Capital, Development capital, and Secondary buyouts. The differences between the different investments mentioned are beyond the scope of this piece.

The Business Plan and financial returns

The business plan is a cornerstone requirement for any PE proposition. It is a critical document outlining management’s strategy for business, key milestones (and how these will be achieved), and an assessment of the outlook for the business within its market. PE firms are looking for companies which satisfy the following criteria, all of which should be addressed by the management team within a robust and well-structured Plan:

a) experience and committed management;

b) good products/services;

c) strong market position

d) high/predictable margins;

e) the potential to double the money within three years (generating an IRR of 25-35%)

f) running yield and the capacity for the payment of arrangement and monitoring fees; and

g) foreseeable exit opportunities.

Preparing the Business Plan is, in many ways, a balancing act. On the one hand, it must describe Target’s business and opportunity accurately and appropriately; however, it must also help sell the opportunity accurately and with proper funders. Management team members may have strength in either of these areas, but only very talented and experienced managers (or well-balanced teams) combine the two effectively.

The facts and opinions expressed in the Business Plan will, by necessity, remain those of management. Given the fundamental importance of the Business Plan to investors’ decisions to invest, the management team will be required to warrant the content of the Business Plan to the investors in the legal documentation (details outside the scope of this piece).

The standard contents of a Business Plan are as follows:

1. Executive summary
2. Background
3. Products and Services
4. Operations
5. Market analysis
6. The management team and organisation
7. The strategy
8. Financial summary
9. Funding requirements
10. Milestones
11. Risk assessment and sensitivity analysis
12. Exit review
13. Appendices