What is Private Equity and How Can It Help Your Business?

Tarah Mills

February 17, 2020

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If you're waiting for Warren Buffet to unexpectedly show up and offer to buy your business, you'll likely be waiting for a long time. However, there are hundreds (if not thousands) of much smaller private equity investors and groups that could be interested. If you're looking to sell your business or retire, buy out your partner, or need to raise capital for growth, private equity investment money could be your solution.

Buffet's Berkshire Hathaway and other groups, like The Carlyle Group and Kolhberg Kravis Roberts, are widely-known Private Equity Groups. You can think of these groups like huge bank accounts for their team of wealthy financiers. They purchase and sell both private and public companies in order to turn personal profits.

How Does Private Equity Work?

When you find that it's the right time to sell your business, getting in touch with some private equity investors is the right move. It's possible to quickly find the perfect buyer. Some business owners avoid selling to private equity buyers because they consider them to be financial buyers. They don't think they'll pay as high of a cost as a buyer who wants in for strategic reasons. However, private equity transactions often happen much quicker and easier than the alternative. This is why private equity is such a solid option.

Private equity investors sit in a strong financial position. This makes the negotiations and closing processes go very smoothly. They are very good at buying and selling businesses because it's what they do for a living.

Private Equity Isn't Just for When You're Leaving Your Business

Even if you're not ready to get out of the business, private equity investors still make excellent partners. These investors set up flexible strategies that benefit all parties involved. One example they successfully employ is called "taking two bites of the apple." This basically means that the investor will buy a part of your company today and more of it down the road. In this agreement, the amount of control the investor has in the company is negotiated.

The first purchase has two purposes:

As a business owner, you get personal cash from the business
The business itself gets a cash influx to use for growth

The next purchase typically happens after the company has seen growth. This is the time when you can get some serious cash out of the business and retire. Everybody wins with this strategy. You win because you took money out of the business and put it into personal affairs, like a second home or your retirement accounts. Your business wins because it beefs up the balance sheet and gives your business room for growth. The investor wins because they bought a profitable, established company.

What Private Equity Investors Look For

These investors look to make profits on investments in several ways:

Use their resources to get a business prepared for public offering
Liquidate/break up the business, then sell off assets for profit
Deploy talent and cash influx to grow, then re-sell the business

Obviously, private equity investors aren't going to want to buy every company that's presented to them. They're seeking businesses that have rapid potential for fast growth. When it's time to seek out private equity funds, be prepared to show a solid record of sustainable growth. Also, be prepared with a specific plan on how you plan to spend the funds they invest.

Boutique Private Equity Groups

Private equity groups come in many different sizes and shapes. The largest groups manage more than $40 billion in funds and have portfolios in the hundreds. There are also much smaller groups that invest only a few million dollars into only a couple of businesses.

Smaller groups like these are referred to as boutique private equity groups. They might be run by a family or even an individual. Or, they could be organized by groups of professional investors or friends. Boutique investors typically have more interest in running the businesses they purchase.

Can Private Equity Help Your Business?

Private equity is a smart idea for many business owners. The key is finding the best private equity investor for your situation. Throw your hat into the private equity ring and see who turns up.