7 Ways to Benefit from Private Equity Beyond Just Capital
As a business owner, you may have the eventual goal of selling your company. But if you’re earlier in the growth phase of building your company, you may not think the timing is right because you don’t want to give up control of the company. Or maybe you believe that private equity firms can only offer capital and not much else to grow your company.
With the right private equity partner, you may find that they have a lot more to offer your company beyond just a check. Even if you’re not interested in selling 100% of your company now, majority or minority recapitalizations allow you to reap the benefits of a private equity partnership while still retaining an ownership stake. Below, we’ve rounded up the top reasons that you may find a sale – even a partial sale – to be beneficial in accelerating the growth of your company and achieving your personal goals.
Growth Capital
The infusion of capital into the business from a private equity firm can be used in a variety of ways. For growth-oriented business owners, the most interesting of these can be investment in growth initiatives. This could include equipment purchases, capacity expansion, technology upgrades, or acquiring other companies. In addition to the capital needed to fund these initiatives, all – especially growth-via-acquisition – require significant time and mindshare from owners to execute properly. A private equity firm can help shoulder this burden by sharing what has worked at other companies, helping to narrow down potential service providers, and leading acquisition searches.
The mindset around growth and the associated risk profile also changes once you partner with a private equity firm. For many business owners, a substantial portion of their net worth is tied up in their business. This means that major growth initiatives—whether it’s building out a new division or large capital expenditures—are funded personally. Many business owners can be understandably hesitant to fund significant outlays of capital that potentially won’t produce a return for months or years. With a private equity partner, because you no longer have to put only your capital on the line to fund these initiatives, growth plans are often much more accelerated.
Some private equity firms (like ours) also offer direct support in areas such as sales, marketing, business development, accounting, or operations, to name a few. For small-to-medium enterprises, some of these functions may be insignificant or non-existent within your company. For example, depending on the industry, many successful companies of this size have grown organically without ever having dedicated marketing resources or a marketing plan. You can utilize private equity firms to help build the infrastructure needed to scale a company quicker and unlock new levels of growth.
Broadened Perspectives
Partnering with a private equity firm can open up a new, expanded world of strategies, ideas and perspectives. Especially for firms like ours, which have been operating for decades, we have seen the good and the bad across multiple industries and economic cycles. Chances are that we have seen or been involved in a situation similar to what you may be facing as a business owner and can offer our experience to supplement decision making. This makes for an excellent sounding board to brainstorm and bounce ideas off of.
Private equity firms are also in the unique position of having a pulse on industry trends across multiple sectors, as we evaluate hundreds or even thousands of companies per year. This means you can leverage us to act as the eyes and ears for your business on a much larger scale than you would typically have on your own.
Larger Networks
You can also take advantage of a private equity firm’s support in the form of introductions to experts in fields like supply chain, human resources, or technology. Because private equity firms typically develop a large network of consultants and advisors, both that they use internally and externally with their portfolio companies, partnering with the right one can give you access to a larger pool of vetted options to potentially collaborate with.
Note that a private equity firm’s network typically goes beyond consultants and advisors. Of particular interest to many business owners is access to a peer group of other founders and CEOs. It can sometimes be lonely at the top, especially when navigating tough challenges like inflation, a recession, and a tight labor market. As part of a private equity portfolio, you can more easily access other CEOs across multiple industries in a confidential, non-competitive setting to share best practices and hear what has (and what has not) worked for others.
Projecting Bigger
Not only can a private equity firm help lead recruitment processes for executive positions (including introductions to their proven recruiters), but you may also find that being backed by a private equity firm allows you to recruit higher-quality talent.
Often, smaller companies may struggle to attract top-tier talent to build out a high-caliber leadership team. When a company is backed by institutional capital from a private equity firm, it can appear more institutional—with a defined strategy and growth plan, an established reporting infrastructure, a board to provide credibility and accountability and a true team-based atmosphere rather than a sole proprietorship. For many high-quality leaders, this is much more attractive than relying on one individual owner.
Beyond recruitment, partnership with a private equity firm may add further legitimacy to the general market’s perception of the company. Companies backed by private equity often receive more press coverage, interest from journalists, and general interest from the public. If you’re looking to expand brand awareness and perception of your company, a private equity partner may help accelerate this goal.
Meaningful Liquidity
Beyond the benefits to your company, a private equity partnership may help accelerate your personal goals. The most obvious of these is that any type of sale provides liquidity. For those not selling 100%, recapitalizations provide partial but meaningful liquidity. If you – like many business owners – have most of your personal capital tied up in your company, this can help diversify your assets and protect the wealth you’ve spent years building.
At the same time, because you are not selling 100% of the company in a recapitalization, you retain a stake in your life’s work. Many business owners like the fact that a portion of their equity is still invested in a company they love and know better than anyone else.
Control
As many business owners know, liquidity isn’t the only consideration when selling and exiting a company. There are the emotional considerations and the very real questions about what you will do with your time post-sale and what will happen to the legacy you’ve spent years building. With a recapitalization, you have control over what role you want to play in the company post-transaction. If you’re passionate about leading your company and want to accelerate growth plans with the help of a PE partner, you can stay in that role.
Suppose instead you want to take a step back from day-to-day operations, perhaps to enjoy some form of retirement or explore other passions. In this case, you can explore taking a board role and remaining involved as an advisor while continuing to own a portion of the company.
Because of the flexibility here, recapitalizations can be ideal for even younger business owners who simply want access to more capital or other resources that PE partners bring to the table to grow their company. This is a decision you’ll want to have clarity on before any transaction to ensure that any potential PE partners are aligned on your role going forward.
Second Bite of the Apple
Beyond the initial liquidity event, with recapitalizations there’s also the “second bite of the apple,” which happens when your PE partner eventually exits after the company has achieved its growth objectives. Many business owners, especially those seeking full retirement, choose to fully exit their stake in the company at this point. Sometimes, an owner’s proceeds at this “second exit” can exceed their original proceeds from the original PE recapitalization.
While many business owners think of private equity as an eventual exit strategy to “cash out”, an investment from a private equity firm may be leveraged to achieve your growth goals in a quicker time frame and with less personal risk.
