You’ve most likely heard the term private equity (PE) but maybe don’t really understand what they do. We are here to help with a quick and easy-to-understand overview PE and when it can be highly effective.
At its core, private equity is an investor whose focus is to acquire and manage companies. During the management phase, PE is trying to maximize growth to ensure the business grows or improves margins by bringing in consultants to optimize operations.
Some might say PE is similar to venture, but there are some critical differences. Most private equity firms choose to invest in a mature business instead of a startup. Focusing on companies generating a profit with stable and sustainable growth characteristics. A PE firm makes money due to the leverage (debt) it uses when making an investment, unlike a venture firm who only uses equity (cash) when making an investment. When the PE firm sells the business, the growth of the business or margin improvements help payoff the debt.
An important thing to note is that some private equity firms specialize in a certain type of deal. For example, there are private equity businesses that focus on purchasing companies dealing with a financial struggle (i.e., a strong underlying business going through bankruptcy). Others focus on acquiring newer businesses, which they eventually grow and sell for a profit. There are also private equity companies that focus on secondary buyouts or those that just stick to a specific industry or sector. Understanding the type of PE firm that is reaching out to you is critical, because it gives your negotiation power to ensure that your company aligns with the goals of the PE firm’s.
There are a variety of different private equity deals, each with its own specifics. These deals are categorized based on different circumstances.
That depends on the private equity company and its strategy. Most of the time, cost cutting is one of the popular actions taken by a private equity firm. Before selling to one, you have to ask yourself, where is “fat” in your operations. Make sure you are comfortable with the fat being trimmed – this could be excess software usage, capex spend, people or anything else. Another strategy is to restructure the business by selling non-core assets or licensing IP instead of manufacturing. In other cases, they enter new markets, adopt new technology or develop unique strategies based on industry trends.
Capitalize on private equity advisory services to boost operational efficiency and utilize expert financial restructuring, management support, and tailored exit planning strategies to drive significant business transformation and long-term sustainable growth.
