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4 Ways to Pick the Best PE firm for your business

Posted by Devayani Bapat

April 8, 2024

A guide to all things private equity and how to benefit from an investment by a PE firm.

We live in a world dominated by shows like Shark Tank, which often influence our perception of the investment world and how it works. These shows usually make one believe that we are well-versed in the ins and outs of private equity firms; however, the world of finance and investments is far more nuanced.

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Small businesses and startups often need help finding financial support. While venture capitalists help, private equity firms wield substantial resources to catapult these firms toward success. Different types of private equity firms have varied focuses, so when working with one, there are some questions you must ask before choosing the best fit for your business needs.

What is a Private Equity Firm?

Have you ever heard of someone who likes to flip homes for a living? Private equity firms function on a similar concept. They buy firms, refurbish them, give them an operational makeover, and then sell them for a profit.

Sounds confusing? Let us explain.

Buy Low, Sell High: Both flipping homes and private equity firms operate on purchasing assets at a lower value, giving them a makeover or restructuring, and eventually selling them for a considerable profit.

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Value Addition: Not just that, both aim to add immense value to the asset they’ve purchased. For instance, when one flips a home, they renovate the property and eradicate any problems there might’ve been to make sure its market value skyrockets. Similarly, a private equity firm acquires a small business struggling to stay afloat or undervalued to restructure it and improve its functionality to add a sense of streamlined direction by injecting capital into the company. The core lies in revitalizing a home and company to restore its competitive market value.

Profitable Returns: Apart from that, private equity firms, too, like house flippers, aim to eventually exit the arrangement with a profit, making sure to generate substantial returns in the process.

At its core, a private equity firm is an investment firm. It uses its funds or those of investors to buy private stakes in established companies or startups. The idea is to use a considerable chunk of capital to invest in a company that will provide a promising rate of return for them.

What are the types of Private Equity Firms?

There are four prominent types of private equity firms, and we’ve listed them for you below:

  • Venture capital firms

Venture capital firms resort to raising money from reliable and private limited partners to invest in startups or larger companies that show immense promise and a potentially high rate of return.

  • Growth equity firms 

Growth equity firms shy away from investing in startups and instead invest in established companies and organizations that have proven successful. However, these companies still need capital to take their business to the next level, which is when they seek out PE funds.

  • Buyout firms

A buyout firm specializes in acquiring a predominant controlling stake in a company that is underperforming or undervalued according to market standards. These firms aim to add strategic changes to the company’s core functioning with funding from institutional investors, wealthy private individual investors, or sometimes, even loans.

  • Mezzanine firms

Mezzanine private equity firms provide mezzanine financing to companies. What is mezzanine funding? It is a blended form of financing that combines debt and equity to offer capital to companies that require additional funds for growth, expansion, or restructuring, to name a few. In such a deal, the lender company can convert its debt into an equity stake after the senior debt lenders have been paid off in the event of default.

4 Ways to pick the best PE firm for your business:

When looking to work with a PE firm to gain capital investment, one must consider asking specific vital questions, some of which are listed below.

What resources is the private equity firm offering?

Before you close a deal with a PE firm, make sure you, as a business, have identified the gaps in your strategy that have stunted your growth. Ensure you know your need of the hour and what you need from the PE firm once they rake out the moolah for you. This first step will ensure you get the most out of your collaboration.

Once you’ve identified these gaps, ensure you know what the PE firm is offering and whether its resources safely fill in the gaps in your business. The firm is right for you as long as they have the resources necessary to help your company grow and excel in whatever you need. PE firms do not take a one-size-fits-all approach, so finding one that best fits your needs is essential.

What is the management style of the firm?

When you sign on to a private equity firm for your business, it is imperative to consider its management style. Suppose you’re in search of an active firm. In that case, you should look for one that takes on a more on-the-field, hands-on approach that typically involves rigorous reporting, an active voice in decision-making, etc. In contrast, if you’re looking for a firm to avoid day-to-day matters, structure the deal to be more advice and consultation-based. Ensure you understand your company’s need for the hour and base your business decisions on keeping a fruitful partnership in mind.

Can the firm offer references and success stories from working with a business of similar size?

The best way to gauge whether a private equity firm is good for you is to talk to and study its list of past clients. Testimonials act as armor to aid you in your decision-making process. By looking at companies a firm has invested in, you can clearly understand the deals they’ve closed and the size they’re used to working with. Investigating records can help paint quite a clear picture of how the firm will handle dealings with you, your management, and adverse situations and their actual contribution to the growth of your small business.

What is their strategy?

One of the most important things to consider when assessing a potential private equity partnership is its strategic approach to business growth. There are two distinct approaches: one that is playbook-focused and the other that’s more bespoke and tailored to your needs.

Now, what does that mean? The playbook approach involves using strategies that have worked in the past. It includes pre-established protocols across other businesses, immediate cost reduction, and rapid innovation, often overlooking your small business’s finer details or needs.

On the other hand, a bespoke strategy involves deep-diving into your business and addressing its needs with an approach tailored to suit it. It often requires more time, but it is built to address the little details that may need attention to ensure a more wholesome growth plan.

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The Key Takeaway:

Partnerships of any kind can be daunting, especially when you’re the founder of a small business. When you’re a founder, a sense of attachment to the company and the need to reign in on all the decisions can kick in; however, getting in some investment from a PE firm can lend you some breathing room. The pivotal question remains: How do you select the right private equity partner for your business? Fundamentally, step one is to embrace the change and then meticulously evaluate potential private equity partners, ensuring mutual compatibility and shared goals to lay the groundwork for a fruitful collaboration. And if you’re ever in doubt, you can outsource your decision-making to a third-party company that can step in and help you make the right move.

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Want to know more? Since 2006, Escalon has helped thousands of startups get off the ground with our back-office solutions for accounting, bookkeeping, taxes, HR, payroll, insurance, and recruiting — and we can help yours, too. Talk to an expert today.

Disclaimer: This material has been prepared for informational purposes only. Escalon and its affiliates are not providing tax, legal, or accounting advice in this article. If you would like to engage with Escalon, please get in touch with us here.


Devayani Bapat
Devayani Bapat

With 6 years of experience in copywriting and social media management across genres, Devayani's heart lies with weaving words into stories and visuals into carefully crafted narratives that’ll keep you wanting more. She carries with her, her pocket notebook, a trusted confidante that goes with her wherever she goes, and scribbles down into it anecdotes on the go. Her secret weapon for keeping all things copy interesting! Apart from writing, Devayani is huge on travelling. You'll find her booking her next adventure while she's on her current one. And while on those adventures, you'll find her devouring true crime books one after the other. Whether it's a low down on a recent case or one that occurred 70 years ago, she can cook up a story narration you'll never forget.

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