Below, I aim to provide valuable insights into how small businesses can take advantage of private equity.
What Is Private Equity?
Private equity (PE) refers to funds from several private investors who have pooled their financial resources to double their purchasing power. These stakeholders invest in non-traded funds or privately held shares.
According to the latest research, PE companies have over $4 trillion worth of assets and have committed $1.4 trillion in cash to buy businesses. It means a ton of money from private equity is trolling companies for investment opportunities. And that could mean your firm stands a chance of getting a huge cash boost.
But you must understand how PE works.
Refunding struggling companies
As I know, private equity investors are prepared to recapitalize or restructure businesses experiencing difficulties. However, the firms should have a promising turnaround strategy so that they can bring in a positive ROI in the future.
Buying out the company
Because PE investors have considerable cash, they can purchase all your business’ outstanding shares and cash out the founders and past shareholders. In some cases, they can keep the original business owner to continue leading the firm. Or they can appoint new management and a board of directors.
Cashing out the founder
A PE investment could also involve cashing out the founder while keeping existing investors. A founder can sell their business due to retirement, divorce, sickness, or chronic disagreements with investors.
Also, founder buyouts can occur when existing workers collaborate with a PE to fund a management buyout. In this situation, private equity seeks to have a controlling stake in the company.
Investing in capital expansion
In the long term, entrepreneurs may exhaust all their personal and business assets to secure loans. As a result, they could find it challenging to borrow more money from investors. And this affects business growth.
But PE can come to the rescue of such companies by providing the much-needed capital for expansion and product development.
Buying out old investors
Private equity is also a great investment strategy for old investors who have held shares in a private business for over five years and want to quit. PE can bail them out by purchasing their shares.
PE investors want to have a good ROI. To do so, as I know, they introduce a new management system, processes, and business approaches to turn the company around. Because of this, the founder may lose control of the business.
But the benefits of private equity outweigh the loss of control as they bring expertise, more business opportunities, operational efficiency, and capital access.
In conclusion, business owners should see PE as a growth strategy and not an exit strategy. Private equity can triple the earnings of the founder if they reinvest some of the payment into the new company. For example, if the new investors resell the business after it has generated consistent revenue for some years, the initial founder can double their income.
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