We often field inquiries from our clients about the best sources of capital for their businesses, and one common question we hear is whether private equity is right for them. Here are six factors you should consider to determine if private equity is right for your business.
Are there opportunities for growth that cannot be financed through commercial credit or capital contributions from existing owners?
Private equity firms can often provide the capital to help jumpstart growth if a company has a solid infrastructure and management team, but lacks the financial resources to execute growth strategies.
Do you lack an internal buyer for the stake you wish to sell?
If you want to take some money off the table but do not have the option of selling to an insider (e.g. management or a family member), private equity is a viable alternative. Many private equity firms will consider a partial buyout and allow existing owners to continue to play a key role in the business.
Are you willing to give up control?
The pool of private equity firms that are willing to make a minority investment is shrinking and, as a result, you may have to transfer control of the business. This means that decisions you currently make on your own could require board approval (think compensation, investments, and strategy). Additionally, private equity firms actively monitor business performance and want explanations for variances from plan. If you are comfortable surrendering some level of control as well as being accountable to another owner, then private equity is an option worth considering.
Is it likely that the business will achieve growth targets?
If you are confident that the business will achieve growth objectives, then private equity financing may work. However, relationships can turn sour if the business fails to meet these objectives, because the private equity firm may need to play a more active role in managing the business in order to protect its interests.
Are there private equity firms that specialize in your industry?
Like most businesses, many private equity firms now have teams of specialists devoted to specific industries. Because of their span of knowledge and deal-making experience, they can often contribute in ways that increase value for all investors.
Have you defined your long-term goals and considered all other exit strategies?
Pursuing an exit strategy without defining your overall personal financial plan is like driving without a map. Before deciding on any particular strategy, it is important to define your long-term objectives and consider how all available exit strategies line up with those objectives, because the differences in long-term value resulting from each option can vary dramatically.
To discuss your plans and exit alternatives, contact us.
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