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Whether it is private equity, line of credit, or bridge financing, how you fund your business will affect your organization. With private equity, it is more important if your deal gives your investors controlling shares of the business. Looking for private equity is not just about obtaining funding; you are entering into a partnership when you take on private equity investors.
What is “Private Equity”?
Private equity is a share of ownership in a company that isn’t publicly owned, traded, or quoted on a stock exchange. Private equity firms are organizations that invest in privately-owned companies in exchange for an ownership share. Some private equity companies might be focused on a particular niche within an industry. Others may be more open with a desire to invest money in different industries.
How Does Private Equity Compare To Other Funding Options?
The biggest difference between private equity and other funding options is the flexibility and ownership. The more equity in your company you sell, the smaller your claim to profit is. The reduction in your share of profits can outweigh any interest cost with traditional debt financing.
This is important to note because it shows what a large risk you’re taking when you fund your company with private equity. You won’t need to qualify in the same way you would for debt financing. More importantly, though, you can be much more flexible about deal structure.
This flexibility allows private equity firms to fund your business in a way that’s mutually beneficial.
What to Look For With Private Equity Processes
Private equity investors are looking to buy low and sell high. If their plan does not align with your business’s goals, there is going to be problems. If you get into a deal, there is often very little you can do to get out.
Find a Knowledgeable Investor In Your Industry
Funding via private equity is like bringing on a new business partner. The value of that partnership will depend on what it provides you. Their guidance and expertise you receive from quality private equity investors is what makes them so valuable.
When you are searching for private equity, make sure you are testing their knowledge. Ask them questions about what their experience has been like with other companies they have invested in. Find out where they think the industry you are in is going and why your company is a good opportunity.
Scour Their History
Any private equity firm you work with will do their due diligence on you and your company, so you should be doing the same to them. It is recommended that you run background checks, call their former clients, speak to members of corporate boards the firm works with.
Do not be afraid to ask questions. You need to find out what and how they think about investing and business. scouring their past will help you discover things you want to ask questions about. this is a great way to find the best private equity people that are open and willing to talk about their successes and failures.
Find Out If People Have Made External Investments In Them
External investments are a good sign that you are working a with a proven firm. This will also give you an insight to their investment style. If a venture capital firm is backed by large, institutional investors, they will have a fairly narrow investment profile. They may be more limited than other firms in terms of deals they like to do.
Do Not Forget About Your Instincts
Your gut instinct should play a role in your decision as well. Moving forward with a private equity means they will become a part of your business. You should feel confident about this decision before you make it. Do not feel pressured to work with someone just because they check the right boxes. If something does not feel right, don’t do it.
