Private equity financing is exactly what the name implies – money is invested in a privately held business in exchange for partial ownership. The money that is invested may come from private individuals or institutional investors which means there are plenty of opportunities for finding capital for business expansions.
The goal of the investment, of course, is to earn more return than could be earned otherwise. It can be like venture capital or angel investors in the sense the investors can choose to invest startup funding, but usually the business has been operating for a while and needs money for expansion. Private equity financing often involves large amounts of capital, though there are really no hard and fast rules about amounts.
Giving Investors the Assurances They Seek
Despite the fluid nature of this type of financing, there are criteria a business will have to meet in order to obtain this type of business funding. Like equity partners, the investors will look for assurances that their money will be used wisely and in a way that increases the likelihood that the investment will bring higher returns than would be expected if giving business loans. The investor will balance the risk of investment loss again the possibility of investment gains and then make a decision as to whether the risk is manageable.
Following are the general guidelines on what an investor will be looking for when deciding whether to accept the risk that is associated with private equity financing.
· Does the entrepreneur assume more risk exposure than the equity partners or investors?
· What stage is the business currently in and does it need startup funding, early stage funding or expansion funding?
· How much experience does the management have in the industry and business?
· How large is the investment request and how does it compare to the size of the business?
· Is there a quality business plan with realistic goals and projections?
· Is the marketing plan complete and include well defined strategies?
· What is the company’s history including its historical financial and market performance?
· Is the business willing to accept investor restrictions placed on the investment?
The last question may seem obvious at first glance, but it’s on the list for a reason. Private equity investors can set their own unique requirements and restrictions for business funding, and you must be willing to agree to them. The good news though is that you have more negotiating leeway since this is private funding and not financial institution lending.
Finding the Right Kind of Capital
Though companies have been experiencing difficulties getting approved for business loans in the current economy, private equity financing has always been available. Unfortunately many business owners simply don’t know how to go about finding or raising this type of money. It’s similar to venture capital in many ways and one way is that you must know where to look to find it. Everyone knows how to march down to the bank and get turned down for a loan, but too many people overlook the investing opportunities that private equity financing offers.
There are many sources of capital available today ranging from angel investors to private equity financing. The one that is right for your business depends on many factors including the current business stage.