As most small business owners have now become painfully aware, banks are just not lending as much as they used to anymore and merchants who want to borrow to expand their businesses, buy much-needed equipment or add employees are hard-pressed to obtain funding.
Many are turning to Private Equity Investors for financial assistance but is private equity investment the answer to small business funding needs?
What Are Private Equity Investments?
Private equity investors provide money for privately owned enterprises such as start-ups or already established small businesses that want to expand their existing companies. Private equity investors can be either individuals or groups who pool their resources together to provide a private equity fund. Among the most common investment strategies in private equity are leveraged buyouts, venture capital and growth capital.
- leveraged buyouts: A leveraged buyout is a financial transaction in which a company is purchased with a combination of equity and debt, such that the company’s cash flow is the collateral used to secure and repay the borrowed money
- venture capital: Venture capital is financing that investors provide to startup companies and small businesses that are believed to have long-term growth potential. Venture capital generally comes from well-off investors, investment banks and any other financial institutions. However, it does not always take a monetary form; it can also be provided in the form of technical or managerial expertise.
- growth capital: Growth capital popularly known as expansion capital is capital provided to relatively mature companies that require money to expand or restructure operations or explore and enter new markets. So basically growth capital serves the purpose of facilitating target companies to accelerate growth.
Private equity groups are looking to make a return on their investments in any one of several ways:
- Deploy cash and management talent to grow the company for resale.
- Use their financial skills to prepare the company for a public offering.
- Break up or liquidate the company, selling off assets at a profit.
Know Your Investors
Private equity firms are not sentimental. They have an ironclad imperative: buy low, sell high. They usually purchase a controlling share in a company, bring in a combination of debt and equity, and manage the company in a way meant to increase its worth. Ideally, everyone profits when the company is sold, including the former owner, who gets a slice that is worth more than the original pie.
Most private equity investors are looking to make, at minimum, about two times their money and be in the deal for three to five years. So if your plan was to pass your company down to your firstborn, then private equity is probably not a good fit.
Know What You Want
Starting with the end in mind is key. What do you want? Are you trying to get capital for growth or for yourself but continue in the day-to-day operations? Or do you just want out entirely?
Owners who hope to stay involved should remember that most private equity firms want a controlling stake. For some founders, becoming employees of the companies they created is fine, if that’s what it takes to grow. For others, it’s intolerable.
Do Your Homework
When considering a deal, entrepreneurs should run background checks, call a private equity firm’s former clients and speak to members of corporate boards where the firm’s investors are active. A private equity partner should bring deep industry expertise, fresh connections, and experience in tapping new markets: in short, more than just money. Do the investors add value? Can they do things I could not do — introduce me to new markets, help me source products from different areas, help me with online lead generation, bring me into the digital age?
For an entrepreneur who finds the rare match of capital, talent, and cooperation, the benefits of private equity can be considerable.
Limitless Investment & Capital Private Equity
Limitless Investment and Capital is dedicated to ensuring your small business succeeds by not only making sizable growth capital investments but also by providing the best practices designed to help your company achieve substantial and measurable growth.
Our passion for helping owners get their small business on track for success is what separates us from other investment firms. With broad experience in navigating the difficulties of growing an organization, in addition to our best practices and capital resources, we have what it takes to bring your company to the next level. Schedule a FREE consultation TODAY!