Enter Private Equity…
Bar the door or put out the welcome mat?

We think we can do it on our own. With little effort our company will sail on smooth waters and watch the sun as it rises on our success. After all, our respected company has garnered praise, earned respect and remains in the black.

We meet investors expectations. The company is healthy and we’re progressing.

But deep down inside we know our goals haven’t been stretched and boundaries remain unchallenged. Full potential is still unrealized.

The company needs to expand.

Expansion will take a partner with capital. We don’t need a loan from the local bank or a buddy from college. Expansion—done the right way—will take tens of millions. Enter private equity…

Private equity may sound like a perfect solution or scary as heck. Either way, there’s a lot to consider. Do your research and understand just exactly what you’re getting and exactly what you’ll have to give up.

Success or failure of the partnership depends, first, on you. The process of choosing a partner—a private equity firm—is a really big deal. Like any good partnership there will be smooth times and rocky moments. The experience will (in large part) be dependent on which firm is chosen.

An examination of case studies proves a company shouldn’t necessarily choose the firm with the highest evaluation. That is only one factor among many.

For the purpose of this discussion, the focus is on expansion. But there are many reasons companies partner with private equity. Some companies don’t have quite the rosy outlook. They’re in the red and struggling for air.

Whatever reason a partner is needed there are pros and cons to be considered. The dynamics of your company—how it operates, who makes the calls and how business is done—will change. Absolutely inescapable. If change is welcomed or even tolerable, PE could be a real option.

Even if your company is healthy your new partners will break out the microscope, the looking glass…even the telescope. That’s their job. They’re looking for ways to smooth out the rough edges, make things more efficient and capitalize on their expertise.

The PE firm will examine the company with fresh eyes. With a good partner, this is a good thing. Check your ego at the door, perk up your ears and open your mind. The new partner has a lot of skin in the game. This might just allow them to make the tough decisions—without getting the heart involved. It might come in the form of management change or a shift in company direction. The changes might be numerous or very subtle.

According to business.tutsplus.com, the combination of funding, expertise and incentives that accompany a strong PE deal can

translate to a sharp rise in annual profits. A 2012 study by the Boston Consulting Group reported that more than two‐thirds of private equity deals resulted in the company’s annual profits growing by at least 20 percent, with almost half the deals generating profit growth of 50 percent a year or more.

The most difficult stage of a private equity partnership might not come in the beginning—or even as decisions are made—but in the end.

The investment horizon may come after five to seven years, or maybe ten. Before committing, research your new partners track record in exit strategies. You might catch a glimpse at your future.

A common exit is through an Initial Public Offer (IPO), selling the company’s shares to the public. Or the PE firm might prefer to exit via strategic acquisition, selling the company to another, with investors taking their share from the sale value. In a secondary sale, the exit strategy finds the PE firm selling their shares to another firm. This route is not uncommon.

Another exit strategy, often very attractive for management, is the option of buying back the equity stake from the firm.

Often taken when no alternative viable option is apparent, is liquidation. This is most often considered when the investment has failed.

Alfred Zaccagnino, the Samarian Group of Companies, finds an advantage in being a boutique PE firm. “Service is a significant element in whether a private equity deal succeeds or fails,” he notes. “ We work face‐to‐face with our partners. We work to understand where the company is succeeding and where it may need some work. Clients tend to choose us because we’re a boutique firm, not in spite of it.”

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