Most business owners would have a few good suggestions for you if you asked them where to get a loan. However, if you ask these business owners about private equity financing, they would not be quick to answer. When asked where to find private equity, most entrepreneurs recommend consulting a lawyer or accountant. This article will provide an overview of private equity financing so you can decide whether it is right for your business.
Is Private Equity Financing Right For You?
Small business entrepreneurs often say they don’t know where to get capital or that their area is underserved. Also, many private equity firms are only interested in companies of a specific size, industry, and cash flow profile.
Private equity funds are drawn to companies they can understand, provide value to (at the right price), and connect with. Then, private equity investors will prioritize the deals they think are ideal for them
Some of the pros and cons of private equity financing include the following:
Pros: Funding options outside of what a regular bank would provide, opening the door to projects like expansion and mergers that would otherwise have been impossible.
Cons: Private equity financing is expensive. Bank financing is always the most cost-effective option, regardless of the state of the economy or the credit cycle.
The biggest drawback, however, isn’t monetary; instead, it’s allowing another person into your business as a partner. Small business entrepreneurs don’t realize how uninvolved lenders are. The lender demands frequent disclosures, payments, and covenant adherence but isn’t involved in your company’s daily operations. Private equity investors approach things differently. The investors will form a board of directors (or join an existing board), establish policies for using any new funds, and design a compensation plan for the company’s leadership.
Bottom Line
It’s essential to consider the upsides of private equity financing, but also whether you can handle someone being that involved in your company. This is a breeze for many business owners. They might already be answering to an owner, partner, or relative. However, for those who founded or have solely managed the business, this is a radical shift in organizational structure.