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Private Equity: What it Means and How to Decide What Business to Buy

If you’re on the hunt for a business acquisition, enlisting the help of private-equity investors could be the key to closing a deal.

There are pros and cons to any acquisition-funding strategy, including partnering with private-equity investors. If you need equity to buy a business, this type of funding could provide the capital and other resources you need to acquire and operate the business.

As with any source of funding, turning to private equity may or may not be your best option. There are many factors to consider, including the private-equity group’s timeline for a future exit, cultural fit, management oversight and execution strategy.

One thing is certain: private equity has the deep pockets to fund business buyouts. What’s more, many private equity funds boost their buying power with debt.

Evaluating the best source of acquisition funding requires careful examination and planning. Be sure your goals align and be prepared to evaluate the right strategy for you and the future of your business.

Definition of private equity

It’s useful to have a working definition of private equity. The Harvard Business Review defines private equity this way:

“Private equity firms raise funds from institutions and wealthy individuals and then invest that money in buying and selling businesses. After raising a specified amount, a fund will close to new investors; each fund is liquidated, selling all its businesses, within a preset time frame, usually no more than 10 years. A firm’s track record on previous funds drives its ability to raise money for future funds.

The CEOs of the businesses in a private equity portfolio are not members of a private equity firm’s management. Instead, private equity firms exercise control over portfolio companies through their representation on the companies’ boards of directors. Typically, private equity firms ask the CEO and other top operating managers of a business in their portfolios to personally invest in it as a way to ensure their commitment and motivation. In return, the operating managers may receive large rewards linked to profits if and when the business is sold. In accordance with this model, operating managers in portfolio businesses usually have greater autonomy than unit managers in a public company.”

You can read more about private equity in this Harvard Business Review article:

The rise of private equity

Since the recession hobbled commercial and investment banks, private equity investors have stepped into the void. In recent years, they have become a go-to source for mergers and acquisitions.

A recent article in the Wall Street Journal highlights private equity’s growing clout. Instead of turning to investment banks or co-investors, they are increasingly using their own balance sheets to finance deals.

Still, the article also flags the fact that there are potential conflicts in private equity’s new role as deal financiers. It’s important to understand how private equity managers get compensated and whether they remain in good standing with government regulators.

You can read more about private equity’s phases in this Harvard Business Review article:

Qorval’s consulting expertise includes evaluating and working closely with private equity firms and if you’re considering selling your business or taking on an investor, make sure you get objective analysis, due diligence support and other resources; investment bankers aren’t typically objective, and having a Qorval representative on your team can ensure you’re getting objective perspective to make sure the deal, and the partners, are right for you.

To schedule a conversation please call 239-430-0303 or visit us online at www.qorval.com