Private Equity (PE) firms invest in companie that are ready to go public or expand rapidly unlike venture capital investors.
While these are the more common reasons companies seek private investment, it can also be used for other purposes;
• Cash out: PE firms can buy out the entire company and cash out founding members and previous investors completely. They tend to have hard cash on hand which eliminates a lot of speculation and waiting on the part of the current founder/board of directors.
The firm may cash everyone out, choose to either pay out the board while retaining the founder or vice versa. They can also buy out existing investors that have had their money tied up for years but were unable to reap their returns.
The PE firm also has the legal right to install an entirely new board of directors and CEO as they see fit.
• Company growth: If you need to expand rapidly and aggressively, PE firms with their large amounts of hard cash can greatly propel your company to further heights.
This can involve anything from acquisitions to pumping more money into new product development and geographical expansion.
• Revitalize: If the business is struggling but continues to show promise, PE firms are open to pumping in the cash needed to revitalize the company. This is done on the grounds that the company can be successfully turned around.
However, under such situations, existing board of directors and managers may be re-shuffled. This in some ways, is a complete takeover but one initiated by the existing stakeholders.
Due to their tendency to invest at a pivotal stage of a company's life, PE firms can either be seen as saviours of your business or as agents of a takeover.
When a PE firm buys out the entire board, the founder may end up as an employee. Therefore, before you look for a private equity investor, consider if this is a situation you are comfortable with.
Your exit plan will need to cover this stage adequately to prevent any ‘surprises' from occurring.