Although private equity is much better understood today than even five or 10 years ago, many myths persist with business owners. The caricature of PE professionals as corporate raiders is one thing, but the widely held belief that partnering with private equity means ceding control is just as stubborn.
As the co-CEO of a private equity firm, I obviously have a dog in this fight, but I’m evangelical about private equity because it works. Thousands of business owners and their companies could benefit from partnering with private equity in one of many flexible arrangements.
With scores of private equity firms offering hundreds of different strategies, there’s a fit for just about any company. Here are some broad, basic categories:
■ Traditional buyout — This is where a firm takes a controlling stake (anywhere from 51 to 100 percent) in a business. It’s a great option for owners seeking liquidity, a smooth succession plan or a smaller day-to-day role. Many firms prefer the selling owner to maintain a stake, so you can benefit from cash up front and growth down the road. I love when the seller’s “second bite of the apple” is even bigger than the first.
■ Minority investment — Selling less than half of the company to private equity can provide capital to retire prior shareholders, pay a dividend, buy a competitor and/or expand while delivering the operational expertise of a private equity firm — all without ceding control. These deals often have user friendly, creative structures.
■ Growth capital — Smaller, rapidly growing companies might have needs that traditional lenders can’t or won’t address. This type of investment focuses on businesses too mature for venture capital, but usually too young or unprofitable for bank loans. It typically involves a minority stake for the private equity firm, but there are creative alternatives like royalty-based financing.
■ Private debt — Some private equity firms provide loans with terms that traditional lenders cannot match for a variety of reasons. These loans generally involve no ownership from the private equity firm and no oversight beyond the terms of the loan and covenants.
Put another way, partnering with private equity doesn’t mean losing control of your business — even in the case of most traditional buyouts. It means working with a group of professionals who live and breathe growth every day.
Bigger and better
A good PE partner — and I urge people to shop for the right fit by focusing on the people and the culture — will help you in many ways, including:
■ Upgrading management.
■ Investing in product development.
■ Expanding geographically, including internationally.
■ Improving manufacturing and sourcing.
■ Providing targeted operating help to improve sales and marketing, pricing and dozens of other aspects of your business.
Today’s seller’s market is highly competitive. It could be an ideal time to explore a private equity partnership for any of the needs and reasons above. The right firm will be your right partner for growth. ●
Stewart Kohl is co-CEO at The Riverside Co.