I wrote in a previous article that private equity is transformational, including how it helps small businesses grow.
When someone says private equity, they are not just talking about the capital, they are talking about everything that comes with it, including the expertise of the private equity investor. Private equity investors have a fiduciary responsibility to safeguard and grow their investments within a defined industry or strategy, so the first way that private equity helps small business grow is by matching a company’s control ownership group with like-minded private equity partners.
I mentioned control because often private equity gets involved to solve differences of preferred outcomes by owners, the ones who control make the decisions. An example could be a parent and child ownership group with a parent who wants to retire and a child who wants to lead the business into the future. But the child lacks the capital and experience to finance their parent’s buyout without saddling the business with a capital structure that is not consistent with what the company needs for its next phase of growth. That brings us to capital structure.
Strategy drives capital structure. If the company requires a lot of investment to achieve its next phase of growth, then a capital structure with a lot of debt that requires interest and principal payments that send cash outside the business does not make sense. More patient capital, generally in the form of private equity, that does not require immediate repayment allows management to keep cash in the business to make investments to augment growth.
Private equity investors also have a lot of experience in their specific stage of where the company finds itself. Owners going through a particular growth phase and at a particular size are doing it the first time. With the right private equity partner, the owners have a partner who has done it many times and who has a network of connections and advisers they can bring to bear to support the strategy outlined by management.
Private equity investors are also able to help secure financing for the company. They know which organizations provide what types of capital, how the capital is structured and negotiated, and what responsibilities the company has when taking on capital from third parties. Private equity partners are also able to support the acquisitions of other businesses that management seeks to acquire because that is what they do for a living.
It requires a lot of time, energy and effort to source, negotiate, diligence, finance and close on an acquisition. Small business owners need to focus on running and growing their existing business and don’t have the management resources or experience to be distracted by the intensive effort surrounding the M&A process. However, small business owners can support the due diligence and prepare for the ever-important integration process.
Small business owners can also leverage the resources, tools and experiences that private equity investors accrue over many years of how private equity investors have handled similar situations. All of this helps small businesses move faster because it removes the trial and error typically associated with any learning process. Private equity can have a big, positive impact on a small business that wants to grow, provided they have the right partner.
Finding the right partner who complements the small business owner and has a track record of achievement consistent with the needs of the business today and where it needs to go is a vital part of the process to ensure there is alignment, not only in the goals but in the process it takes to get to the goal. ●
Jeffrey Kadlic is Founding Partner of Evolution Capital Partners