Private equity firms have been making waves in various industries, from healthcare to technology, and even sports. While private equity (PE) may seem appealing due to the potential for high returns and the various options it offers as a business owner, it is crucial to understand the unexpected outcomes that may impact your business vision and goals.

Pros and Cons of PE Partnership

PE firms can be great financial partners for a business seeking expansion. They can provide the necessary resources for growth, but it’s crucial to thoroughly understand the terms of engagement before committing to a PE partnership. It’s essential to establish the right partnership regarding your objectives and to have a clear exit strategy.

When considering a PE partnership, it’s important to decide how much control you are willing to give up and how involved you want to be in the company. Any new partner means more people involved in making decisions, so a solid relationship or employment agreement is crucial. Keep in mind that PE firms are only interested in one thing: return on investment.

PE as an Exit Strategy

PE firms can also provide an exit strategy for a business owner. As time goes by, consumer behavior, limiting legislation, and developing technology can impact a business’s ability to remain competitive. For those running a family business, additional challenges such as sibling rivalries, multiple stockholders, conflicting expectations, and commitment levels may arise.

PE can facilitate an exit strategy if the owner is ready to move on, but it’s important to note that the advantages of ownership may pale in comparison to the profits of a sale. PE can provide liquidity, but it’s crucial to consider factors such as the treatment of key partners and management, the impact on employees and company culture, and the compatibility of the buyer with the company culture.

PE’s Lack of Industry Understanding

PE firms are generally unfamiliar with the specific industry nuances and their workings. They conduct business through frontmen who sell the market’s potential profits to PE investors. Real investors are often represented by intelligent, competitive brokers or consolidators, but these “fronters” only have their interests in mind.

Consider the Long-Term Impact

Whether your goal is to grow and sell or create a long-term family asset, partnering with a private equity firm creates many unintended consequences. It’s crucial to understand the potential impediments to fulfil your long-term vision brought on by PE. While PE can be a great source of liquidity, it’s important to consider the long-term impact and resist giving up what may seem like immediate liquidity.

Private equity can be an attractive option for those seeking expansion or an exit strategy. However, it’s essential to thoroughly understand the terms of engagement and to consider the potential impact on your business vision, employees, and company culture. Make sure you establish the right partnership and have a clear exit strategy and resist the temptation to give up control and long-term stability for immediate liquidity.

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The article was originally published on Using a Successor Development Program Can Help You Select the Best Leader

Personal Financial Planning

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We can help you with insights, other resources, and see if it makes sense to work together. At the very least, in 30 minutes, you may get some ideas you can apply to your business right away.