Private Equity: What’s In It For The Business Owner?

By: Mark Gaeto – Managing Partner, Conrad Olenik – Associate

How does the CEO of a private firm grow and build a great company? What does it take for CEOs to cultivate new profit improvement opportunities and jump-start future growth that shareholders can harvest?

Sometimes it takes more than a smart strategy or solid management team to build great firms. There is a critical third piece of the puzzle, and that piece is capital. Capital fuels growth, and having access to capital is key.

What are some of the paths to capital, and how do you go about determining the right amount? Let’s take a look at determining the amount of capital and securing it from private equity firms.

How much capital is required?

If you own a profitable and mature firm that is cash-flow positive, you have many options to fund growth. In addition to traditional debt (senior debt or bank debt), private equity provides another means to power growth and generate liquidity for owners. Many factors affect your options to fund growth, including your firm’s vision, strategic plans, management team, financial health, client base, competitive positioning, cash-flow steadiness, market conditions, and other aspects of the business.

The most critical factor in determining your optimal mix of debt versus equity financing is the consistency and certainty of your cash flow. Therefore, it’s paramount that you have a business plan tied to a financial model that includes a detailed cash flow forecast to determine the amount of capital you will need over the next three to five years. Think big. Determine not only the capital required for current operations, but also for growth initiatives that will drive additional expansion – both organically and through acquisitions. Find an experienced investment banker to build out a researched and detailed financial model and forecast.

The trade-off between equity and debt financing is about risk and cost. Factors influencing the right mix include the maturity level or current stage of your business, your growth forecast and the types of investments needed to fuel that growth, your expected returns and payback, and your comfort with either adding more debt to the company or the diluting effect of an equity infusion.

Working with private equity

There are several types of private equity firms, in a variety of shapes and sizes, based on their fund size and investment criteria. Typically, for companies looking for capital, the most appropriate private equity funds are: leveraged buyout funds, growth equity funds, venture capital funds, debt, and other types of funds. Most of the time, the PE firm will combine approaches, using both debt and equity financing to structure a deal. Private equity investments not only infuse capital into the firm, but they also buy out owners fully or partially.

Figure 1 – Types of PE investments SmartCEO_Private Equity Types

Growth equity funds invest in firms with some level of growth and with EBITDA levels of $2-3 million and above. They seek mid- to late-stage or mature businesses that are looking to scale operations to expand sales and marketing efforts, launch new products, enter new markets or geographies, and even fund acquisitions. They also will invest more broadly than VC funds in terms of industries.

What does growth private equity do for a business owner? It helps them first take some money off the table and next, professionalize the firm for fast growth and a bigger and more lucrative second exit. To achieve these objectives, PE firms strive to do the following:

Define the company’s potential: PE firms generate high returns primarily by creating operational value. They start by understanding the firm from the ground up. They are extremely thorough and fact-based. They scrutinize external and internal factors that limit the firm, but also seek enablers that can drive growth. They then build a rich financial model to pinpoint and assess how the firm makes money. Once that is done, they set up key initiatives that drive growth and allow the firm to achieve its potential.

  • Refresh the vision and develop the action plans: PE plans are actionable ones (or should be). They help the CEO set a vision that is achieved by investing in a few core initiatives.
  • They help the CEO drive or work the plan: These initiatives are assigned to management. Management in turn has the responsibility and incentives to drive these initiatives. These executives are therefore held accountable for the success of the business.
  • Attract and harness talent: PE firms create the right incentives for employees to act like owners, and they create effective boards. They will also bring in the right talent to help the CEO drive growth. The first hire is usually a CFO or controller or VP of sales.
  • Juice returns with debt: Top PE firms embrace leverage. How much debt is something you have to completely understand and negotiate. Debt management is perhaps one of the toughest things for CEOs to get accustomed to and to ultimately adopt. Putting debt on the business needs to be well mapped out. However, CEOs need to get comfortable with debt, as it forces them and their key executives to manage the P&L tightly, make disciplined expense and capital expenditures, and work the balance sheet.
  • Scale operations: Best business practices and processes help owners focus on operational excellence and execution, and thereby create a culture driven by results. Repeatability is key, and implementing standard operating processes drives high performance.

You may already get plenty of calls from private equity firms, as many of these companies have very active outbound prospecting campaigns. Teams of associates make dozens of calls to owners daily. A typical PE fund will look to make hundreds of calls to owners every month and will research hundreds of opportunities for every single investment selected. Speaking to a PE firm is easy. Finding the right PE partner is not. Working with an experienced banker – one who can help you build a reliable financial model and forecast and who can anticipate and manage the issues – makes all the difference when seeking capital from private equity.

If you are bullish on your business and are not yet ready to retire, but you want to take some money off the table or buy out current investors or a partner, moving forward with a private equity firm is an excellent option. PE firms seek strong managers. They are not interested in running your business. They want to invest in a cash-flow positive firm with an excellent management team. The right PE firms will help management in any way they can to drive growth and secure a bigger exit within four to eight years. Finding the right PE firm is essential.

Mark Gaeto is a managing director with Falcon Capital Partners, a leading mergers and acquisitions firm, where he directs their commercial technology practice.

Conrad Olenik is an associate with Falcon Capital Partners and began his career with JPMorgan Chase.

Mark can be reached at 610-989-8903 or