One of the best attributes of private equity is that, when done well, it facilitates transformational positive change in a business. With thousands of private equity funds in the United States, there almost as many different personalities and strategies that can be a great match for your business needs.
What I always ask founders once we are under a letter-of-intent is whether they believe their businesses can go faster and further with us as a partner than if they continue to go it alone. The answer needs to be “yes.” In that vein, the first question you need to ask yourself is how private equity can help scale your business.
The capital that private equity provides can give your business a needed cushion to withstand the inevitable bumps in the road but can also act as an accelerant for well-developed growth plans. Most founders’ growth is restricted by how much free cash flow can be retained in the business to support growth initiatives that could include investments in people, equipment or acquisitions.
Founders are also restricted by how quickly they are paid, their profit margin and how capital intensive it is to grow, or at least maintain, what they already have.
Taking on capital also often means founders can eliminate personal guarantees and take some chips off the table to stabilize their personal balance sheet. This is an important step for organizations in which the founder’s personal balance sheet is separated from that of the company. It means the business is more credit worthy and has more access to financing that appropriately matches the investment made.
Financing available to most founders is often trade credit from suppliers or fully guaranteed lines of credit, both of which need to be repaid quickly. Having a well-capitalized company for the first time allows founders to make investment decisions about their business in a different light because they no longer have to personally fund growth initiatives.
Second, the right partner will complement what your organization is already doing well and support or take over aspects of your business, which allows the organization to do better and go faster, creating more equity value for shareholders and doing so sooner. Most private equity funds today have some operational expertise, so they can make real contributions and not just provide funding.
The historical private equity model of only negotiating financing, building or enhancing governance and supporting mergers and acquisitions is not enough today to set private equity funds apart from other options and achieve the expected returns for their investors. This operational component generally comes in the form of an operating partner assigned to the business, someone who has already grown and successfully sold a business — oftentimes more than once.
Finally, with the right private equity partner, the chances of success should increase dramatically and the ownership the founder retains in the business should also increase. This is because private equity not only capitalizes your business for growth and expands financing options not currently available but also adds capacity and experience at the management level.
This allows founders to move forward with more certainty and eliminate the trial and error that goes with a founder who remains independent and may be doing everything for the first time. ●
Jeffrey Kadlic is a founding partner of Evolution Capital Partners