Private Equity: Should You Take the Money?

The revelation of Mitt Romney’s history as a private equity investor reignited the debate about this heavily criticized industry known for its emphasis on short-term accomplishments.

Private equity is basically defined as a type of investment that aims to gains significant – if not complete – control of a company. It covers a number of investment strategies including the one that involves investors who purchase large stakes in companies that do not perform well in the market. Once these companies are under their control, the investors would use their resources to alter its financial and operational structures. These would often result in the growth of the companies that would later be sold at a higher price.

Unfortunately, not all cases of private equity investments end on a positive note. For instance, an entrepreneur from Atlanta recently shared his grueling experience with private equity investors. Because of his eagerness to expand his online marketing business, he accepted more than $1.5 million in private equity growth investments and venture capital.

In exchange for the financial support, however, he lost his control of the company. One day, he just found himself working as an employee in a business that he started. Several months later, he decided to resign from his job – a good decision, considering that the business is going downhill since the takeover of the new management.

Such horror stories – alongside with the attack advertisements against Romney – reveal the dark side of the private equity industry. However, despite the negative publicity, a lot of business owners are still tempted partner with private equity investors. After all, banks and other credit lenders have tightened their standards following the recent recession.

So for those who are planning to seek private equity investors, what can they do to prevent a bad situation from happening? Here are some of the things that they must do before taking the money offered by potential investors:

Learn about the industry

Before signing a deal with a private equity firm, entrepreneurs must understand how the industry works. They must keep in mind that private equity investors are not sentimental – they simply follow a basic rule: buy low, sell high, get profit. Investors would usually buy enough shares to control the company. Once they have it, they will do everything to increase its worth, with the goal of selling it at a higher price after a few years.

This is the reality with private equity, and business owners must accept this before signing a deal with a potential investor.

Know what you really want

When business owners sign a deal with private equity investors, they must accept the reality that they will have to let go their ownership of the company. Some entrepreneurs are prepared to become employees of the businesses that they created. Others, however, would not be willing to do so.

Before accepting the money offered by a potential investor, business owners must ask themselves: “What do I really want? Do I want the money, or do I want to retain ownership of the company that I have established?”

Check your potential investor

Understanding the industry and knowing what they really want are not the only things that entrepreneurs must consider when negotiating with an investor. More than that, it is important to know whether or not the private equity firm is capable of taking over the company. Do they have the experience of running such businesses? Entrepreneurs would not want to sell their company and find out that it folded because of management problems.

Signing a deal with a private equity firm is risky move. However, if it succeeds, one can expect a profitable result. Before accepting the money, entrepreneurs must always consider every aspect involved in the deal.

 

More detailed information and useful advice can be found at Funded.com Created by Mark Favre, it offers expertise and assistance with developing and funding your concept, including a private forum for queries and discussions. If you need access to investors and funding providers, please do check our website.

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