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Here’s when entrepreneurs should say “no” to a private equity investment.

By May 14, 2021May 17th, 2021No Comments

Imagine you’re an entrepreneur who has done everything right over the last 10 years. Your business is on stable footing. Cashflow is steady, predictable and diversified thanks to a tenured and growing customer base.

In other words, things are great. What’s more, the future is just as rosy: there’s a slightly smaller competitor who could make a great acquisition target, and the U.S. beckons as a highly compelling expansion market. Still, both of those roads require a substantial financial investment and a degree of risk you may never have encountered.

It’s truly “bet the company” time.

It’s often at this point that you might consider a relationship with a private equity firm. After all, the right financial partner will help de-risk that next big growth opportunity and improve the chances of turning your strategy into reality.

But it’s equally worth asking, when is private equity the wrong choice for an entrepreneur?

As a partner in a private equity firm, it feels a little strange to write about saying “no” to a private equity overture. But not every leader whose business ticks all the boxes for a financial investor should necessarily bite. Here are a few reasons why.

You love being the boss

There’s no denying the fact that successful founders are strong-willed, resilient and independent. With the odds stacked against most new businesses surviving in the long term, it takes persistence, ingenuity, networking and years of hard work to start and grow a company. You may believe that because it was your business acumen and industry expertise that got you this far, you know better than anyone how to take it to the next level – if only you had the capital to do it.

If this is your mindset – and you may be absolutely correct – private equity is the wrong move.  PE firms spend years building their expertise in specific industries, geographies and company stages. This is not passive money that sits quietly on the sidelines and waits patiently for a return. PE investors often buy control and take a proactive approach: we won’t tell you what to do, but our experience investing and operating over the years means we’ve seen a lot of situations before – allowing us to bring a unique and new perspective to the table. The goal is to make better decisions and reduce the risk involved in achieving a strategic growth plan by putting our heads together, but only if that fits with your own management philosophy and temperament.

Serial transitions

Taking on a PE partner means that you’re potentially setting in motion a series of transactions that could see your business change hands every five or six years. This isn’t a hard rule, but PE firms have their own investors whose capital they’ve invested in your company. Eventually, they’ll have to realize a return, most often in a sale or other exit. And if your PE-partnered company is sold, there’s an increasing chance the buyer will be another private equity firm that will eventually need to exit as well. Be sure to look beyond your first PE partnership and ensure you’re comfortable with serial transitions for you and your employees.

On the plus side, a transition every few years injects new money and expertise into the business, enables you to pursue new and exciting growth opportunities and offers a powerful incentive to your management team, who can typically look forward to unlocking a financial reward each time the business changes hands.

You could go it alone

We’re very comfortable as Canadians carrying significant home mortgage debt, but few business owners are at ease using (currently very attractive) term debt to finance their growth dreams. Before you approach outsiders for capital, you may want to approach your banker to see if doing it yourself is right for you. If the execution risk is low – for example, it’s a really simple acquisition or a straightforward move into an adjacent market – then a term loan may be just what you need to make your dream come true.

With all of that said, remember that with record levels of investment capital looking for a home, your competitors are probably considering how to finance their own growth plans. Their choices will impact the success of your strategy.

For all of the reasons outlined above, it’s important to weigh both sides of the private equity coin before making what can be a life-changing decision. Before you choose a path, seek counsel from your trusted advisors or better yet,  find someone who has made the leap and see if it’s right for you.

Looking to learn more about our team and portfolio investments? Get in touch with Tracey McVicar at [email protected].

Author: Tracey McVicar

Date: May 17, 2021