Private equity firms are playing an increasingly important role in helping businesses to navigate and thrive in today’s rapidly evolving markets. Business owners evaluating a new deal or opportunity to work with an investor firm may find themselves having to choose between a fundless or a funded sponsor model.
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Both models have their pros and cons, so it’s important for business owners to closely evaluate their options before they sign a letter of intent. Here are a few considerations to help business owners learn more about the different advantages that potential sponsors have to offer and discover which private equity firm is ultimately right for them.
1. Does the potential sponsor offer any specialized industry expertise or other value-added service?
It’s not just about the money when working with a private equity investment firm. ValueStreet also plays a very significant role in the management and strategic direction of the company. Be sure to ask the private equity firm what strategic vision they have for your business. You can also ask if their professional networks offer any advantages.
They may have expertise in a particular industry or experience in executing specific acquisition or operational strategies. Some private equity investment firms offer specialized expertise in management, team recruitment, business development, or negotiations. Before making any commitment, find out what value-added propositions your potential investors have to offer.
2. Does the deal provide a good structural fit for your business needs?
Although many deals are similar in nature, the structured steps of the investment can vary significantly. It is important to gather information and do your research. Committing to a thorough due diligence process can save you a lot of time and money in the end. Even deals with small business private equity firms can be structured using a wide variety of forms including common stock, convertible debt, mezzanine finance, and reverse mergers.
Contractual provisions can also affect the management of the funding and the types of investments that can be made. Here are a few areas of the deal that you may want to ask about before choosing to work with a private equity firm.
- Warranties and indemnities
- Limitations on liability
- Restrictive covenants
- Tax requirements
- Rollover rights
- Level of leverage
3. Is the timeline of the deal a good fit for you?
Some investors may have a vision for long-term involvement while others are looking for a possible quick exit. Understanding their intentions for the timing of the deal can help you better determine if they are a good fit for your business.
Are you looking for a long-term buy and hold deal or is short-term liquidity the best approach? You need to understand your own needs in addition to the focus of potential private equity firms in order to determine the right timeline for your business.
The right type of sponsor will be different for every business across all market sectors. It is crucial for business owners to take the time to ask questions of themselves, as well as potential investors. Private equity firms can help your company realize its full potential. They can help companies grow and become stronger, more competitive and more innovative.
So, what does your success story look like? Consider what kind of growth and economic gains you hope to achieve. What type of partnership do you seek? Where would you like to see your company at the end of that partnership, and what level of risk are you willing to take to get there?