One of the first conversations I generally have with my clients is about their plans for their future.
How will you grow? How will you get investment capital? When do you want to exit?
These are all questions I ask with great frequency.
And, as you might guess, a common answer is that the client wants to grow big enough to get private equity financing. Usually private equity is used as a stepping stone to an IPO.
I believe private equity investment in your company can be a great path to growth. But like everything else it has its pluses and minuses and interests that have to be balanced.
So if you think a private equity investment might be in your future let’s take a look at some things to consider.
#1: Private Equity Is In It For Their Growth
Private equity funds tend to be run by very sophisticated management teams that are focused on profits. The whole point of their existence is to make money for the investors.
Generally a private equity fund or “fund”, as people commonly call it, will be raised by getting high net-worth investors to commit money to the fund. Once this commitment is made the fund goes out and finds target investments within the fund’s objectives.
And funds screen a lot of potential investments. If you make it to the point of being selected by a fund for serious discussion of investment you’ve made it farther than most.
At that point funds are looking at your management team’s ability to grow your business to where it needs to be. Make no doubt the fund is screening your company based on its ability to contribute to the growth of the value of its fund.
The fund investors expect growth. The fund managers are compensated based on it. And the fund managers need to show growth to bring in the next round of investors into the next fund.
In general this growth focus aligns your company and the fund. But it can have its downsides too. Particularly if your investment windows are different.
#2: Private Equity Has Set Investment Windows
Speaking of investment windows, it is a fact that funds have set investment windows. Usually funds are raised from investors for a set period of time. The fund will open at the beginning of the window of time, bring in investors, and cash out at the end of the fund’s term.
What this means is if your company is taking on investment you have to know when their investment term ends. Their motivation will change over time and it can impact the interactions with your company.
At the end of the term of the fund the fund will want to cash out its investment position for its investors. That means your company might be sold to another investor, merger or moved into another transaction as their windows close.
This is definitely a dynamic you need to understand as a business owner and plan for. You want to be a good partner to the fund but you also want to understand how it’s motivations can impact your planning.
#3: You May Get Some Amazing Opportunities
Private equity funds are generally very well connected in the financial community. Among other things fund managers are various funds know fund managers at other funds. Additionally each fund has its own portfolio of companies it owns.
It is not uncommon to see one portfolio company owned by a fund to do business with another portfolio company. This can immediately drive sales into the stratosphere.
Additionally fund managers often know where to go to get more sales, create partnerships and develop opportunities.
Here they are using their connections and profit motivation together to drive your company to be bigger and perform better. It can be a great thing.
Add to this that many funds have an experienced management team that can advise your business and you can see why many funds have a track record of getting their portfolio companies to expand rapidly.
#4: The Relationship Is Critical
The funds will be trading on their relationships to help you.
In turn your relationship with the fund, and it’s personnel, will be critical.
A private equity fund investment is very much like a short-term marriage. They’ll be all up in your business. You’ll be meeting with them, reporting to them and most likely have one or more of their folks on your board of directors.
This relationship can go very well and bring out the best of both sides. Or it can get contentious.
The key is to think about this relationship, maintain it and make it as good as possible.
Small investments in the relationship can have big impacts.
#5: You Could Be Expendible
Generally as part of the investment the fund will take a lot of legal control over your business. This means they could, in theory, replace the management team.
Most leadership do not get attacked by funds and are left to run the business with significant input from the fun.
But in some extreme cases, particularly when the company doesn’t perform as expected, the fund has replaced the management team including the CEO. The roles and titles are much less important than the growth and performance that the fund is driven to achieve.
So it should be a known risk as a leader that you could be replaced by a fund if things don’t go as well as planned.
What To Do Next
If you still think private equity funds might be your future use this article as your jumping off point. Get to know the industry better.
And if you get closer to a deal research each fund and how they have done in the past. How have their portfolio companies faired?
In the end it’s a relationship game. Is the fund you are taking money from someone you want to do business with?
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NOTE: This article is a piece develop a small portion of the content of the book tentatively called The Journey: Finding Your Place From Entrepreneur to CEO being co-authored by The Our Shawn McBride and Ann Gatty. If you want updates on the book including the possibility of joining our release team or getting one of the first copies please join our mailing list here.
DISCLAIMER: This article talks about legal issues. I am a lawyer licensed in multiple US jurisdictions, but I am not your lawyer unless we have signed an engagement agreement. Please view this material as educational and general in nature (as it is). Consult counsel you have retained for advice on your specific facts and circumstances and applicable laws. Do not rely on the statements in this article as legal advice.
By: The Our Shawn McBride, is the business nerd and long-time business attorney that focuses on changes of ownership in businesses. He works with business owners that know their business is about more than themselves to get ready for their future through keynotes, training and personalized solutions. In furtherance of this he hosts The Future Done Right(TM) Show where he collects, digests and gives lessons and insights on The Future of Business. If you want regular content on the future of business subscribe to get new blog posts from us here.
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The Our Shawn is based in DeLand, Florida (between Orlando, Florida and Daytona Beach, Florida) and Dallas, Texas where he keeps offices. You can also find Shawn on webinars or traveling nationally or internationally for speaking engagements.
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