As an entrepreneur, you spend years nurturing and growing your business – it’s your baby. You’ve seen it through the stumbles and the falls and you know what’s best for it! Once you’re successful, with a fully grown business, private equity suitors will start to call on it. There will come the time when you need to make a decision that every successful entrepreneur faces: “Do you chase the suitor off your porch with a shotgun or do you embrace it as a member of the family?”
For many entrepreneurs, private equity firms represent viable options to achieve personal and professional goals. Perhaps you have the opportunity to acquire a competitor and double your business, but a bank won’t underwrite the full purchase price. Maybe you are planning for retirement and realize your entire net worth is tied up in a single, illiquid investment (your business). Situations like these can be tough. That’s why it’s important to consider that when you partner with a private equity firm, it allows you to diversify your net worth, continue running your company, and scale your business more quickly.
In previous posts, we walked you through what a private equity firm is as well as the different types of private equity firms. In this post, we will help you evaluate whether or not private equity makes sense for your business by asking you four simple questions.
Question 1: If you got hit by a bus, would your business still exist?
Private equity doesn’t make sense for every type of business. If the answer to this question is “no,” then private equity probably isn’t a fit for your company. Private equity firms rarely invest in sole proprietorships where the success or failure of the business depends on one person’s expertise. If the answer is “yes” and you have a team with infrastructure in place allowing the business to scale without requiring more of your time, then continue reading.
Question 2: Do you want capital, but aren’t ready to sell 100% of your company?
If you want capital to diversify your net worth, cover personal obligations or pursue growth initiatives, private equity could be a good option for you. A private equity firm will exchange cash for equity in your business. This cash can go directly into your pocket, but you should keep in mind that generally, only profitable businesses have that option. It can also fund growth initiatives such as acquisitions and product expansions.
Most private equity firms will only buy a portion of your company and require continued involvement by founders after their investment. This partial sale of a business is called a recapitalization. Recapitalizations allow entrepreneurs to receive partial liquidity and continue to create value as the business grows.
Question 3: Do you want strategic support for your business?
If you seek resources to help pursue growth opportunities, optimize your business or bolster your management team, private equity could be a good fit for your business. Most private equity firms offer some sort of strategic expertise or resources in addition to capital. One of the main benefits that all private equity firms share is that they have worked with many different businesses. Private equity firms can help entrepreneurs navigate strategic decisions because they have been through these same decisions with other companies.
Question 4: Are you willing to bring on a partner for your business?
If you answered “yes” to questions 1-3, this is the final and most important question in evaluating whether or not private equity makes sense for your company: Are you willing to give up some control of your company? Selling to a private equity firm is no different than bringing on a business partner. Private equity firms will require a say in the decision-making process in order to protect their investment. The level of decision making they require varies greatly by the stage of your business, how much you are selling and your businesses financial profile.
Are You Ready to Share Your Baby With a Private Equity Firm?
If you answered “YES!” to all these questions, then private equity likely makes sense for your business. Bringing on a private equity partner can help you achieve personal liquidity and access resources to further grow your business.
For information on what a typical private equity process looks like, see this post here.
If you’re interested in learning more about the different types of investors, check out this post.
If you’re ready to start talking to private equity firms, we created another post to help you evaluate private equity firms.