How Can a Private Equity Group Help Your Small Business?

It’s not likely that Warren Buffet will come knocking on your door asking to buy your company, but there are hundreds, maybe thousands of smaller private equity groups, or PEGs, that might. And if you are looking to raise growth capital, buy out a partner, or just sell out and retire, a PEG might be the perfect fit.

Warren Buffet’s company, Berkshire Hathaway, as well as legendary companies such as Kolhberg Kravis Roberts and The Carlyle Group are examples of private equity groups. These companies are primarily giant bank accounts for a team of financiers that buy and sell private (and sometimes public) companies.

How They Work

If you are ready to sell your company outright, contacting one or more PEGs is a good idea; you may find just the right buyer. Although many people argue that a PEG is a “financial” buyer and will not pay as high a price as a “strategic” buyer, PEGs can make a deal happen more easily and quickly because of their strong financial positions. Negotiating and closing a deal with a PEG is often a smooth process. After all, buying and selling companies is what they do, and they are very good at it.

If you are not ready to exit your business, a PEG can be an excellent partner. Often a PEG will work with an entrepreneur on a strategy called “taking two bites of the apple.” This odd phrase simply means that the PEG will purchase some of your company now and some more later. The issue of whether the PEG will gain any control of the company is open for negotiation.

The purpose of the first purchase, or bite, is twofold: You get some cash out of the business for your personal use, and the business also gets some cash for growth. The second purchase, or bite, is usually after your company has grown, and that’s when you can really cash out.

The “two bites” strategy is a win-win-win. You win by taking money out of your business and putting it toward personal goals such as retirement savings or a second home in the mountains. Your company wins because it receives some cash for growth and improvement of the overall balance-sheet health. And of course, the PEG wins because it buys into your company now but gets the continued benefit of your experience and passion for growing the business.

PEGs are looking to make a return on their investments in any one of several ways:

• Deploy cash and management talent to grow the company for resale.
• Use their financial skills to prepare the company for a public offering.
• Break up or liquidate the company, selling off assets at a profit.

Of course, PEGs are not going to be interested in every company. Keep in mind that they are looking for rapid growth potential. Not all businesses can make use of cash to boost sales, so if you are gunning for a PEG investor, be ready to show a track record of growth and a business plan to use extra funds.

Boutique PEGs

PEGs come in all shapes and sizes. The largest manage funds of more than $30 billion and build portfolios from dozens to hundreds of companies. But plenty of smaller funds invest just a few million dollars into fewer than 10 companies over their lifetimes.

The smallest of these are generally called “boutique PEGs,” although their investment activities are often opportunistic and defy easy definition. Some dabble in venture capital such as early-stage investments and later-stage growth opportunities or buyouts.

Small boutique PEGs may be run by a single individual or family. Wealthy families often allocate a percentage of their assets to gamble on private investments. Boutique PEGs might also be organized by a group of friends or professional investors. These kinds of investors sometimes want to run the companies they buy.

But boutique PEGs are not the only ones that invest in small businesses. If your company is posting good revenue and profit, look further up the food chain. The majority of midsize PEGs want to invest in, or purchase outright, companies with $20 million or more in revenue and $5 million or more in earnings before interest, tax, depreciation, and amortization.