A Primer On
Private Equity
Firms
By Mike Taylor,
CPA, principal
(Millersburg office)
L
ast week, Frank called Phil and
said, “I’m with a private equity firm
and I want to buy your business.”
Phil was left stunned and confused. “Who
is Frank, why did he call me and what is a
private equity firm?” he wondered.
He asked one of his friends – who also
owns a business – and her best guess
was, “Don’t private equity firms buy
businesses and sell them for parts?”
This is a common misconception.
Many people have heard of private equity
firms, but that doesn’t mean they know
what they are or how they operate. Read
on to learn private equity firm basics, and
find out whether they could benefit your
business.
What is a private equity firm?
At their core, private equity firms are
interested in acquiring businesses that
will eventually be eligible for re-sale at
a profit – that’s how they make money
for themselves and their investors. When
handled properly, these arrangements
can be beneficial for all parties involved.
Typically, a private equity firm acquires
a company when the owner decides the
time is right to convert his or her investment to cash. Many reasons can drive
PRIVATE EQUITY FIRMS ARE INTERESTED IN ACQUIRING BUSINESSES THAT WILL
EVENTUALLY BE ELIGIBLE FOR RE-SALE AT A PROFIT – THAT’S HOW THEY MAKE
MONEY FOR THEMSELVES AND THEIR INVESTORS.
that decision, but they usually revolve
around family and estate planning.
The firm pools the resources of wealthy
investors and institutions and acquires
all or a significant part of the ownership.
Their goal is then to support management and grow sales and profitability.
Generally speaking, these acquisitions
are relatively short-term in nature. Private
equity firms expect to hold their ownership for a period of five to 10 years and
then sell their ownership interest. They
often use a leverage model in their planning, but anticipate generating a return
on their investment that is above average
for their investors. And they continue to
look for good quality companies and are
always buying and selling to meet their
investment objectives.
Much like the companies they acquire,
private equity firms come in different
configurations and sizes. While each size
has its own distinct strengths, smaller
firms tend to provide sellers with a more
personalized experience. It’s often easier
for the seller to get a feel for exactly the
kind of relationship they’ll enter in to with
a small firm. This is an important consideration for the seller, especially if he or
she will have a continued role in management. Smaller firms often employ a more
laid back management style than larger
firms, and they tend not to interfere in the
day to day operations of the company.
Why consider selling to a private
equity firm?
Selling to a private equity firm is a great
way to reduce your financial risk and
plan for the future, and it’s often a strategy I suggest to clients who are interested in selling.
Although financial service providers can field inquiries from such firms
and provide referrals, firms sometimes
contact businesses directly. If you find
yourself in a situation like Phil’s, make
sure to consult with your accountant
or financial advisor first. It’s essential
to understand all of the implications
involved with this type of arrangement
before deciding if it’s right for you.
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