Enterprising Women Vol 10, No 2, 2009

36 enterprising Women B Y L E S L I E F R ECON T here are many reasons why your business could benefit from equity capital, and there are many options available. You could be an emerg- ing growth company, not eligible for traditional bank credit, but with a promising business plan—or an established business wanting to launch a new product line or to expand through acquisition. You could be a business owner looking for personal liquidity, but not ready to retire. You might be an outright seller, with a management team ready to take over the business under new ownership. You could be a business with a solid fundamental operation, but too much debt—or in need of help to get to the next level. All of these scenarios are candidates for private equity capital. The key is finding the right partner. Private equity comes in many shapes and sizes. There is also a lot of it out there, but it can be quite difficult to find, depending on the type of business and its stage of evo- lution. Early stage companies with strong growth prospects typically look for venture capital, in the form of funds or angel inves- tors (high net worth individuals). Typically, these are technology driven businesses that need capital to build out the product and take it to market quickly. Much of what is discussed in this article also applies to such situations, but our focus is going to be on more established businesses, that have a product or ser- vice in the marketplace and are looking for capital to grow, or have achieved a level of revenues that enable a sale of the business. This type of capital is called growth equity or private equity, and the sources are funds that are managed by professionals, who in turn are financed by institutions and high net worth individuals. The managers of these funds are typi- cally people with backgrounds in finance and operations, sometimes with a special industry expertise, such as healthcare or green technology, for example. Let’s focus first on growth equity. Growth equity funds make minority and control invest- ments in businesses that have strong growth pros- pects leading to an expected sales transaction or liquidity event within a five year period. The liquidity event is neces- sary to return capital to the fund’s investors, and must be equally desired by the busi- ness owner for this type of investment to work. The size and type of busi- ness that is of interest to an equity investor can vary depending on the invest- ment strategy of the fund, and normally those crite- ria are spelled out on the fund’s Web site. In a minority investment, the structure is usually in the form of pre- ferred stock and includes voting rights to allow the investor to influence certain key decisions, such as sale of the business, changing the capital structure, hiring man- agement or approving budgets. The fund investor typically takes a board seat upon completion of the investment, and works actively with the management team to execute the agreed upon business plan, that creates value for the shareholders Cover Story How to Pick a Private Equity Partner growth equity private equity A good private equity partner brings the cash you need to grow your business and the operational and financial expertise to drive growth to a well-executed exit. size & type