This is what a private equity firm does

Joining with a private equity firm can be interesting for SMEs looking for investors.

Investors who are initially willing to inject capital into your business, but also provide expertise and support to help the business grow. A private equity firm invests in your company and wants control and shares in return.

In this article on private equity firms, you'll find:

1. How does a private equity firm work?
2. Advantages and disadvantages of a private equity firm
3. How do you attract a private equity firm?

Private equity firms do not invest small amounts, but focus on tens or hundreds of millions of euros under the name of private equity. As a result, they also choose mature businesses, because the money is invested for a longer period of time. Some 90% of Dutch equity in private equity is pooled in the Dutch Association of Private Equity Companies, the NVP.

1. How does a private equity firm work?

An investment from a private equity firm means they get a stake in your business, allowing the investor to contribute with valuable know-how, a network and years of experience. Everything to help your business grow and increase the value of the investment. Such a company is usually expert in a particular sector or type of business. Here's what a private equity firm's process looks like overall:

• Your business sells a portion of your shares to a private equity firm in exchange for capital;
• The private equity firm becomes co-owner of the company and usually also takes a seat on the Supervisory Board or the management;
• You work to achieve your goals and the investor contributes knowledge, expertise and capital;
• After several years (5-7 years), the company sells its shares to you or another investor.

2. Advantages and disadvantages of private equity firms

There is no question that a company needs capital to grow, but how far are you willing to go? Do you want to offer an outside party a say in your day-to-day operations? We have listed all the pros and cons of receiving investment from a private equity firm for you.

Advantages

• Capital - You suddenly have enough capital to grow your business, room to innovate or finance other acquisitions;
• Flexibility - When you borrow money from a bank you have to pay interest and repayment and in this case you do not. As a result, you experience more financial slack;
• Expertise - Your investor's valuable knowledge and experience is an asset to you. This, combined with an existing network, all works to help you achieve your revenue goals.

Disadvantages

• Control - In exchange for the investment, the company receives a say in your business, which more often than not leads to disagreements. Do we go left or right? Anything can become a discussion;
• Dilution - Your ownership rights are diluted because you no longer own all the shares. As a result, not only do you have less control, but you also receive less profit;
• Exit strategy - Over time, the private equity firm sells the shares again, so there is often pressure felt by the entrepreneur to achieve certain goals. Performing is good, but keep a close eye on the context.

3. How do you attract a private equity firm?

1. Determine financing needs and growth objectives
   Determine the funding needs and growth goals for your business. This helps to clearly understand the funding needed and what you want to achieve with the capital injection;
   
   
2. Find a suitable private equity firm
   Research several private equity firms and select one, or several, that match your industry, company size and ambitions. It is important that the private equity firm is experienced in your industry and has a good track record;
   
   
3. Business plan and financial projections
   Prepare a solid business plan that describes your business' growth goals, strategies and market position. Be sure to include sufficient financial projections, including projections of revenue, costs and profitability. This helps the private equity firm assess the potential of your business and determine whether it is a good investment;
   
   
4. Negotiate the terms
   Are you ready to set up a potential partnership? Then the real work starts! Negotiate the terms of the investment with the private equity firm. Discuss the valuation of your business, the percentage of shares you sell, and the role of the private equity firm in the organization. Make sure both parties are satisfied with the outcome of the negotiations;
   
   
5. Conclude an investment agreement and a shareholders' agreement
   Lay out the agreements in an investment agreement and prepare a shareholder agreement. These are legal documents that regulate the rights and obligations of both parties and form the basis for effective cooperation. Definitely enlist professional help for this, because you really don't want to find out later that you haven't protected your affairs optimally;
   
   
6. Work together with the private equity firm to realize your goals
   Once all the paperwork has been completed, the real showdown will take place. Realize previously set goals by, for example, entering new markets, investing in technology or making acquisitions. The private equity firm often brings valuable knowledge, experience and networks to support your business;
   
   
7. Provide an exit strategy
   Finally, make sure the private equity firm has an exit strategy. Private equity firms usually want to sell their shares after a number of years. Discuss together how, and when, the private equity firm can sell its shares. Consider various options, such as selling back to you as an entrepreneur, reselling to another investor or offering for sale through an IPO.