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Is Private Equity for Me?

Private Equity Basics
Private equity investors buy shares in a private company intending to help grow and, eventually, sell the business. Limited partners provide the funds, and general managers select and manage the investments. Private equity groups usually take a controlling or significant interest in companies in one of three ways:

1.  Venture capital
Here, investors focus on early-stage companies expected to produce strong revenue in a few years, or later-stage companies that are likely to generate increased profit in a year or two.
2.  Buyout and acquisition financing
Private equity investors use a new business plan and, sometimes, new management to improve a company’s financial performance.
3.  Expansion or merchant banking capital
With this approach, investors focus on established companies expanding their operations or entering new markets.

Plenty of myths surround private equity investors. For example, some business owners fear that, if they partner with a private equity group, it might make off with the value of their company by buying low and cutting them out of the rewards when it later sells the company at a premium. This kind of concern generally is unfounded. Private equity can be an excellent way to obtain the funds and expertise you need to grow your company. Before taking the leap, however, you should know the facts about these types of investors.

Shared Control
A partnering company can use the private equity group’s cash infusion to launch new products, make acquisitions or pursue other growth opportunities. Selling to a private equity investor doesn’t mean losing control of your company.
Owners generally retain a substantial interest in the business and, thus, also benefit as the company grows and is eventually sold. In fact, selling less than half of your company allows you to retain full control. Even if you keep only a minority interest, you may be able to work out an agreement with the investor that keeps operating and strategic decisions in your hands.

Early Exits
Another misconception among some business owners is that private equity investors are only interested in their exit strategy. It’s true that these groups realize a profit when they sell — so they can’t be expected to hold on to an investment forever. However, they typically expect to work with your company over a period of five to seven years. When it’s time to sell, you may even have alternative exit options. You might be able to use bank debt to repurchase shares and recapitalize your company, find a new private equity investor to guide you to the next level of growth, or raise capital from a strategic partner.

Importance of Expertise
Getting a fair price for shares in your company is vital to a successful private equity partnership. Before you seek financing, work with a professional business valuator to determine your company’s current market value. But price shouldn’t be your only criterion for a private equity partner. You don’t want to give up a chunk of your business to a high bidder that doesn’t understand your company and industry, and that may have unrealistically high expectations for growth. This type of relationship is likely to sour when expectations can’t be met. Instead, partner with an investor that shares your goals and understands the challenges you face. Many private equity groups specialize in particular industries — so look for one with multiple business investments in your sector. Expertise investing in similar companies means your partner may be able to recognize patterns that aren’t obvious to your management team. The private equity group also can introduce best practices from other businesses and give you access to a network of professionals to help — from recruiting talent to business partners.

Know Your Goals
Private equity investors can help your business grow in ways that you would never be able to on your own. A thorough review of your strategic plan, the market environment and your other financing options will enable you to decide if private equity is a viable option.

Small Business Transaction Market Place Continues to Improve

After showing a slight improvement in 2012 versus 2011 in small business transactions, the 1st quarter of 2013 has started with a bang!

According to BizBuySell, the internet’s largest business for sale marketplace, small business transactions increased by 56% over the 1st quarter of 2012.    The number of transactions reported represents the highest number of businesses sold in a quarter since the 2nd quarter of 2008!

Financials Strengthen
Sales price on transactions, as well as revenue and profits reported in those transactions, all increased significantly in Q1 2013. Sales prices increased by over 20% in year over year comparison.

Dallas / Fort Worth area shines!
In reviewing the total number of business transactions during 2012, the Dallas – Fort Worth metropolitan area reported the sixth largest number of transactions in the country during that period.

There are many factors to consider when determining the right time to sell a business.  Clearly, the economy is one factor, and in particular, the market place for business transactions.  The last few years have been a very difficult time to maximize the sales price for a business, but we are now seeing the pendulum swing back in the right direction.  2012 marked the third year in a row for improvement in the market place, and Q1 2013 report is further validation of the continued improvement.  However, that doesn’t mean that it is the right time for every business.  Let us help you assess your business, and help you determine if you are positioned properly to maximize the sales price for your business!