There may be a huge net benefit to shareholders in the long run, but it often comes at the expense of employee pain, which never looks good as a headline on the evening news or in the New York Times. Private equity is not the poster child for being kind, and there are several cases of private equity firms being dishonest to companies and their employees. So we have listed the top 6 pros and cons of selling to private equity.
Private equity is frequently lumped within the category of leveraged buyouts. On the other hand, private equity is a fairly broad word for a sector that deals with anything from minority and majority buyouts/buy-ins to total ownership transfers.
This article will help you understand private equity, the pros, and cons of selling to private equity, and ultimately help you decide whether to keep it on your own or swim with the sharks.
Private equity is a group of investors that invests mostly in the lower middle market. It works by buying stocks from the company and trying to sell them in the next five to seven years. Of course, the ultimate goal is to raise the value of the stocks and make a profit.
Of all investing options out there, private equity can raise the biggest funds. These firms don’t only invest in starting companies, and they also invest in financially struggling companies and companies that have been on the radar for a long time but don’t have the funds to grow their business.
What is essential for a small, big, or any kind of business to grow and expand? Of course, funding and capital. It’s difficult to get money for a business or startup, but private equity companies may provide a startup or struggling company the financial boost it needs.
Private equity may offer the highest sums of money of all of the choices we’ve looked at. More funding means more money. More money means more equipment, human resources, sophisticated facilities, and in the end, better product and more significant profit.
Private equity firms aim to enhance every aspect of the company they invest in, to optimize performance. This entails improving business operations and marketing strategies, boosting cash flow, reducing expenses, enhancing strategy and planning, and expanding the organization.
The difference between other financing sources and private equity companies is that the investor is far more involved in your business. Private equity companies are far more hands-on and will assist you in thoroughly reassessing every part of your company to determine how to increase its worth.
These groups are run by masters of business administration with extensive expertise in managing middle-market enterprises’ financial and operational aspects. Even the most well-run businesses frequently benefit from their knowledge.
They also have the propensity to view things from a new angle, enabling them to make adjustments in places the original stockholders might have overlooked. The investors will do everything they can to profit from their investment. This means they will find the best and most experienced people in any field, to work on your project.
If you’re a person who takes pride in your business and a big control freak who wants everything done your way, selling your business to private equity might not be the best idea. Selling your business to private equity means you aren’t the only one pulling the strings and making decisions about your company’s future. With this funding option, you get more assets but give up shares.
It depends on your deal with the firm and the number of shares you are left with. Sometimes you can lose control of the direction your business is headed. You can lose control over many important aspects of the business, from the management team, employees, partners, and companies you work with to plans, expanding strategies, etc. The investors’ priority is profit, and everything else is secondary.
Every change in our lives comes with a risk. Whether you are quitting your old job to hope that you’ll find a better one, starting your own business, or selling your old one to private equity, you need to be prepared for everything. Before you sell out your company to some strangers, do your research!
Check the background of the private equity trying to get involved with you. Check their past projects, success rate, companies they’ve invested in, and their plans for the future. Don’t be impressed by the sweet talking of some experienced sales assistant. There are many cases when the companies failed, were buried in debt, and had to declare bankruptcy.
Not all of them, but some private equity firms charge fees to the owners. These fees can be a boarding fee, recruiting fee, management fee, and financial analyses fee.
Capital is not free. Capitalism offers advantages as well. Many businesses fail to recognize the qualitative components of the cost and value of selling to private equity. This is one of the reasons it might be difficult to evaluate whether selling to a private equity group is the best approach and, if so, how to select the best private equity group, partner.
If you’re a business owner, eventually, you will come to a point where you’ll have to decide either to keep your company the way it is or to seek help and expand it. Whatever you choose, consider the points in this article, the pros and cons of selling your business, research the private equity trying to buy your firm, take a deep breath and decide. Good luck!