Understanding Private Equity

Business owners have choices as they begin to think about ownership transition and management succession. As you manage in an increasingly competitive environment, it is important to understand the partnership options.

Successful owners tell us thatthey think about a few key questions...

Answering these questions will be crucial in identifying the right partner

What are your financial goals?

Do you have a desire to diversify your net worth and access a liquidity event in a certain time frame?

If so, what is that time frame?

What are your personal goals?

Where do you want to spend your time and energy in the next few years, running a business day to day or advising at a higher level?

What chair do you want to be in?

What is your vision for the company?

How do you think about the growth trajectory of the business?

Do you see it growing geographically into new markets, expanding end markets, growing through acquisition or organically or both?

What does success look like in your vision?

What kind of partner do you want?

Do you want a partner to assist in forming strategic growth plans and recruiting top management talent?

Do you want a collaborative partner who helps you set the direction relating to your company's operations, systems, sales and marketing, finance, or strategic pricing?

Do you need help evaluating organic growth and acquisition opportunities?

100% Buyout

Works well for an owner seeking an immediate full liquidity event and one willing to cede control and stop running the business day to day

Vision for the company would then be put in the hands of the acquiring firm to assure the future growth of the business and the legacy

Majority Recapitalization

An investor partners with existing owners who acquire a majority position of the business (51% or more) while the existing owners keep a minority ownership interest and future upside

Works well for business owners who want to stay engaged in the business as much as the two parties agree

Allows company partnership to further grow in anticipation of a complete sale

Owners who have the capacity in their personal goals to stay involved in the business to some extent

Minority Equity Investment

Sell minority stake of the business

Sometimes referred to as growth equity capital

Works well with a high growth business that needs capital to grow and expand the business

Current owner and management team stay in their seats, continuing to run and expand the business

Investors are simply providing equity capital and some expertise in order to facilitate growth

Owner able to accept a lesser liquidity event

Control and vision are kept in the hands of the current owner

Mezzanine Debt Investment

Can provide flexibility to free up cash flow for expansion or other needs while allowing maximum equity retention for the owner

Adds to company’s debt load and will need to be in a position to adequately service that additional debt

Allows the owner to keep full control and can allow runway for the owner to grow and mature the business before exit

Not ideal for an owner seeking to immediately diversify their net worth or targeting a less involved day to day in running of the business

Increases leverage on the business can increase risk

As a business owner, you need to fully understand the implications of the structure and whether it will meet your needs, but also understand what it will be like to work with the firm for the next five years or more.

All of these questions will be key in identifying the right partners in a potential transaction.