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The Truth About Private Equity and Your Business

by | April 23, 2024 | Industry Insights, Education, Private Equity Recapitalizations

Reading Time: 5 minutes

If you’ve always dismissed private equity as an option, now might be the best time to reconsider. Too often, business owners assume private equity is going to come in and gut their business, just to drive up EBITDA with some financial engineering.

While this may have been true several decades ago when leveraged buyouts were killing companies, times have changed: private equity (PE) firms these days have to be much more growth-centric than most people imagine, at least if they want to prepare a company for a sale.

Why? Private equity brings a lot to the table, and goes beyond mere funding—it’s about elevating your entire business to the next level. When you partner with a PE firm, you’re not just getting an injection of capital; you’re tapping into a deep well of expertise and industry know-how.

 Let’s take a deeper look at why you should consider private equity as an exit strategy.

The Benefits of Partnering with Private Equity

For entrepreneurs who are constantly pushing the boundaries of their capabilities, private equity provides the necessary support to scale new heights more quickly. Whether it’s refining your business model, exploring new markets, or innovating product offerings, private equity can be a catalyst for substantial growth and improvement.

With a private equity partnership, you’re not just gaining an investor; you’re gaining a partner whose interests are closely aligned with yours. Deals are structured to ensure both parties are motivated to achieve shared objectives, driving toward common goals with a unified strategy.

This alignment helps foster a collaborative environment where decisions are made with both the company’s and the investors’ best interests in mind, leading to successful outcomes for all involved. It also means your business gets an infusion of benefits:

1. A private equity partner can improve your operations and technology

Partnering with a private equity firm gets you a commitment to sharpening your company’s operational effectiveness. They bring proven strategies for streamlining processes, optimizing supply chains, and instilling best practices that boost efficiency and profitability.

Additionally, these firms often invest in cutting-edge technology and innovation to keep your business competitive in a fast-evolving marketplace, ensuring you stay ahead of the curve.

2. You can accelerate your business growth

Private equity firms are not just financial backers; they are accelerators of business strategy. For entrepreneurs who are constantly challenging their own limits, these firms provide crucial guidance to push the business forward more rapidly.

This includes refining business models, entering new markets, and fostering innovation, allowing you to achieve your ambitious goals faster than you might on your own.

3. They provide professionalization and better market positioning

One of the transformative impacts of private equity involvement is the professionalization of your business. This goes beyond mere operational improvements—it’s about elevating your company’s standing within the industry.

PE firms help structure your business to compete at a higher level, optimizing everything from internal processes to customer engagement strategies. This strategic uplift can make your company a more formidable market player.

4. You get access to more extensive resources and networks

Access to a private equity firm’s vast resources and professional network can open new doors for your business. This network includes potential customers, strategic partners, and industry experts who can provide valuable insights and opportunities.

The ability to leverage these connections can be a game changer, facilitating collaborations and partnerships that might otherwise be inaccessible, thus accelerating growth and enhancing your company’s visibility in the market.

5. You get flexible financial options

Most famously, private equity can be a game-changer for your business by providing significant capital to fuel growth, fund technological upgrades, or even to streamline debt.

But these firms are also versatile in how they structure deals, offering creative solutions like earn-outs or seller financing. This flexibility also extends to liquidity events, enabling you to monetize your investment at the right time, ensuring you can capitalize on the value you’ve built in your business.

6. PE firms bring access to new expertise and strategic support

When you partner with a private equity firm, you gain access to a wealth of industry-specific knowledge and strategic insight that can help steer your company through growth and challenges.

These firms often work closely with your existing team or may introduce seasoned executives to bolster your management. Their experience in orchestrating strategic mergers and acquisitions could also open doors to new opportunities and synergies, driving further growth.

7. You tap into new market opportunities with a global reach

Expanding globally? Private equity firms with an international footprint can guide you into new markets, offering the necessary resources and connections. They are adept at reading market cycles, providing insights on the best times to capitalize on industry trends and economic shifts.

This strategic timing can help you achieve optimal valuations for your business, maximizing your return on investment when the market conditions are right.

8. They improve your risk management and stability

Private equity firms excel at managing risk and providing a stable foundation during uncertain times. They use their expertise to shield your business from market volatility and financial uncertainties.

A PE partner will help you navigate through complex regulatory environments, helping you manage compliance risks effectively. This proactive approach not only protects the business but also positions it for sustained growth regardless of external pressures.

9. Value creation and exit strategy

And of course, private equity firms are masters of value creation, diligently working to improve performance and increase your company’s worth. They provide a clear path to various exit strategies tailored to your long-term goals, whether that’s an initial public offering (IPO), a sale to a strategic buyer, or a secondary buyout.

This flexibility ensures that when it’s time to exit, you can do so in a way that maximizes your financial and strategic outcomes.

So, is private equity the right move for you?

Contrary to popular belief, private equity firms today are generally interested in more than just a quick flip, seeking instead to invest in long-term relationships. This approach includes thorough succession planning, ensuring a seamless transition and sustained growth under new ownership if you decide to step back.

While PE can provide substantial capital and strategic expertise, it’s worth pointing out that they still typically utilize debt (leverage) in their transactions. Some people may prefer to avoid this as it means involving a bank in the process, but unlike going it alone, private equity firms manage or co-manage this aspect with you. This collaborative approach to financial structuring can help alleviate the burden of navigating debt, allowing you to focus more on operational growth and less on financial complexities.

At the end of the day, you’re taking on a partner, whether it’s a majority stake or not. If you stick around to run it, you’re getting a partner with a deep breadth and depth of experience, and they can solve the capital constraints for growth.

If it sounds like it might be the right path for you, you may want to read more about putting an advisory team together to plan your exit, or negotiating a deal with private equity.

However, private equity is still just one of many, many ways to recapitalize or sell your company. To learn more about your options and get advice from one of our seasoned investment bankers, book a discovery call today.

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