For many CEOs and shareholders, there comes a time to think about growth or exit. Selling to a private equity party is an increasingly chosen route in this regard.
But what exactly does a private equity partner do and what does it mean for you as an entrepreneur?
What exactly is private equity?
Private equity (PE) literally means "private equity" and refers to investment companies that use investor money to invest in unlisted businesses. These investors put their money into businesses with the goal: to create value and eventually sell a business at a profit.
Unlike banks, which primarily provide financing, private equity parties actually take an ownership stake in a company. And that means they also want to actively think along and steer strategy, growth and results.
A key feature of private equity is that it is often an investment for a specified period of time - typically 5 to 7 years. During that time, the investor's goal is to grow the business, make it more efficient or strengthen it, and eventually sell it back with a capital gain.
It is also often thought that private equity investments are only interesting for large companies, but that image is not true. Especially businesses with stable revenue, good margins and growth potential are interesting - regardless of whether they have 25 or 250 employees.
What are the benefits and risks?
Joining a private equity party is not just a financial transaction. It is also a strategic partnership. Many entrepreneurs underestimate the impact such an investment can have - both positive and challenging.
We list the key benefits:
1. Access to growth capital and expertise.
A PE party brings not only money, but also knowledge, experience and a network. Consider help in expanding the commercial team or setting up KPI structures. Many investors employ specialists in HR or finance.
2. Professionalization of business operations
Private equity parties often provide a more structured approach. This may involve better management information or clear objectives. This provides more control over the organization.
3. Partial sale while maintaining involvement
A common option is for the entrepreneur to sell some of the shares, but stay on (temporarily) as a director or adviser himself, reinvesting in the new structure. That way, if you sell your business in the future, you benefit from another increase in value.
At the same time, there are areas of concern to be aware of:
1. Results-oriented culture
Private equity investors are ultimately responsible to their own backers. As such, they want the business to grow and profit. That can mean increased pressure on performance, and more frequent focus on returns and growth targets.
2. Limited investment horizon
Because PE parties invest with a term, the goal is almost always to resell the business after a few years. That in itself is not a negative, but it is important for entrepreneurs to have a good understanding of what the exit strategy is.
3. Match between people
The "chemistry" between you as an entrepreneur and the investor is essential. You must share the same vision about the future of the business. This is why it is important to talk to multiple parties and look not only at price, but also at the added value, culture and approach of the investor.
A powerful vehicle - if properly chosen
Private equity is not a standard solution, but can be a powerful form of cooperation for entrepreneurs who want to take their businesses to the next level or who want to cash in on part of their ownership. However, it is essential to partner with the right party - one that not only brings you capital, but also fits you in terms of vision and manners.
