Private Equity for Business Owners
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Private equity refers to investors and companies that put money directly into private
businesses that are not publicly traded. The capital for this transaction comes
from retail and institutional investors.
Common uses of private equity are improving the balance sheet, acquiring new assets,
liquidating bad debts and finance investment or expansion. For a small business
trying to locate a decent source of funding, private equity may sound like something
only the bigwigs get involved in, like large investment banks or publicly-traded
firms on Wall Street. The truth is this form of business finance can work very well
for a small or new company.
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While a small business may not be able to access the same level of private financing
as a large, established company, it might be able to turn to private markets in
other ways. The big names in private business financing will not even consider a
small business, but plenty of smaller names will. This industry has a lot of money
to spend.
In 2011, buyout funds, which represent a small slice of the industry, raised $82
billion through August 1. The previous year, these funds raised $42 billion in total.
Three big downsides to transactions in this industry exist:
- Provides needed capital for start-ups without a collateral or lien
- controlling interest
- broken deals
- bottom line profitability
To a small business, the prospect of an unknown firm taking a controlling interest
is terrifying and rightly so. No entrepreneur wants to see his fledging enterprise
snatched from beneath him. Fortunately, private financing companies that deal with
small businesses typically take a minority interest. Even when controlling interests
are taken, the day-to-day management is left to existing staff. Because so much
money is available to small businesses seeking private financing, a seller's market
prevails and small businesses can set the terms of deals.
Sometimes deals simply fall through or break apart due to a multiplicity of factors.
The big companies in private finance deal with the fallout from such transactions
all the time. Even if the deal succeeds, the profitability of the small business
is the key element. What makes deals satisfactory from the perspective of the firm
is the small business keeping its promises in terms of results.
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On the plus side, private financing leaves the small business with a healthy influx
of capital that it can use to invest and expand, growing its balance sheet. The
private financing firm gets to add a promising company to its books, enhancing its
reputation and profiting if it sells its stake in the company later at a higher
price. Private capital helps a small business hire more employees, open new locations
and enter more markets. Funding a business in this manner may even help the company
to spin off subsidiaries in new industries.
Searching for the right firm, fund or company to invest in a small business is often
challenging for any entrepreneur. Fortunately, finding existing opportunities has
never been easier. Entrepreneurs can search through networking organizations like
the Association for Corporate Growth (ACG). ACG has 40 chapters in North America
and Europe. Alternatively, networking with local businesses in related industries
can lead a small business owner in the right direction.
The best scenario is for multiple firms to be interested in buying a stake in the
small business. Competing firms have an incentive to sweeten the deal, even for
a small concern. The variety of private financing firms available to small businesses
today allows entrepreneurs to target specific investors. Galante’s Venture Capital
and Private Equity Directory, published by Dow Jones, contains information on over
2,300 firms involved in private financing. These firms deal in early, middle and
late-stage investments. Private financing companies often have websites that list
expertise, successful deals and information about personnel.
The ideals of the entrepreneur who owns the small business also play an important
role. Someone committed to the integrity of his company and the quality of his products
is not going to let just anyone have a stake in his company. Private financing firms
do respect these principles, and entrepreneurs who find these firms have the best
of both worlds.
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