How Does Private Equity Operate?

By Generational Equity


A few years ago, in order to clear up some misconceptions regarding private equity (PE), the PE industry formed an association called The American Investment Council (AIC). The AIC’s primary role is educational, helping the general public have a better understanding of how the private equity industry operates and how it benefits the economy in general via investing in businesses and helping them grow.

Because, in reality, that is truly how the vast majority of PE firms operate; they exist to invest funds in companies and often then inject capital in them to enable them to grow and expand. Many have very long time horizons post investment and have a vision of growing the valuation of a company both organically as well as via acquisitions, with an ultimate end game of taking a much larger entity public or selling it to another buyer.

Many transactions culminated by equity firms are structured as “partial sales.” This is where current ownership sells 51% (or more) of the current business to an equity firm and then is retained under a new capital structure as a minority owner. Then, at some point in the future, the new business is sold or taken public which then allows the minority owner to “take a second bite of the apple.” This can be quite lucrative if structured properly and managed well.

A good portion of our clients end up participating in a structured event like this even though, at the beginning of our process, most do not have intentions or plans to do so. One of the important benefits of working with a Generational Equity dealmaker is that he or she will typically walk a client through all the potential deal structures that could be possible for an owner. Each client’s needs are unique. We know full well that no two entrepreneurs are alike and, for this reason, every deal we work on requires a dealmaker to truly get to know the client and his/her individual needs.

For many, an immediate exit post sale is the only goal. In a case like this, a partial sale to an equity firm is not a real option. For others, though, especially those that have company growth plans and ideas but simply lack the capital to enact them, a partial sale is a perfect scenario to follow.

Here are a few of our PE success stories:

As you can tell, for each of these business owners, the decision to sell a good portion of their business to an equity firm was based on fundamentals that were determined by the needs of the business to grow beyond the capital constraints facing the existing ownership. As you probably know, often a business’s growth reaches a point where existing ownership is unwilling, due to the risk involved, or unable, due to lack of financing, to maximize its growth potential.

This is where private equity can step in and provide the capital needed for future expansion. This is how the American Investment Council describes the role PE plays:

And here is some interesting research that you might find useful as well to learn more about private equity and how it could work for you:

Another great way to learn about PE funds and how they operate is by attending a Generational Equity exit planning conference. We hold these throughout the U.S. and Canada; they are highly educational and designed with the business owner in mind. In fact, many of our conference leaders and managing directors are past business owners themselves who have successfully exited their companies via an M&A event.

Attending one of our conferences will not only allow you to learn a great deal about all buyer types, it will also allow you to spend time with our team and have one-on-one conversations about your specific needs, both financially and personally.

The reality is: exiting your business is an event that will eventually occur, whether you adequately plan for it or not. We have found that it is far better to take time in advance to prepare both yourself and your business to exit for the maximum profit at the optimal time rather than the alternative, which is when external circumstances force you to exit.

To learn more about our conferences and to determine how you can attend one near you, please follow these links:

Bottom line: When the time comes for you to exit your company, be sure to cast a wide net and evaluate a full spectrum of buyer types.

Don’t make the often-fatal assumption that the only buyer of your business will be a local competitor. Although this may in fact be who you end up selling to, if you start out with that assumption you may be ignoring some far reaching possibilities that could be out there.

Many of our clients who end up using a partial sale to an equity firm as their business exit strategy do not start the process assuming that a PE firm will be the acquiring firm. It is a realization that comes to mind as our deal teams work with them to determine what would be the best fit for the client and the business.

By Carl Doerksen, Director of Corporate Development at Generational Equity.

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