President & CEO of CoolSys. Author of the Amazon bestseller, The Private Equity Playbook, and the upcoming book, The Exit-Strategy Playbook.
If you’re like many entrepreneurs, you might be leaving money on the table — without even realizing it. It doesn’t matter what industry you’re in or whether you’re doing everything right. You may be able to increase how much you make from your business by making one simple shift: utilizing private equity to build your business.
How do I know? I’ve spent the last 20 years building billion-dollar businesses with private equity groups as partners. And, in that time, I’ve realized most business owners (especially small-business owners) don’t leverage private equity to the extent they could, and that means they miss out on big paydays.
I think it’s time to change that. It’s time to turn private equity into your secret weapon for building your business. Here’s how to get started.
Shift your mindset.
Many entrepreneurs are laser-focused on building their businesses. They spend years focusing on strategies to scale and grow. Until they’re getting ready to retire or otherwise exit from their business, bringing in a private equity investor is the furthest thing from their minds.
For these entrepreneurs, private equity is a “one-and-done” deal. They see it as a potential exit path, one they only consider when they’re ready to leave. For them, it’s a way to monetize their business and get that big payday they’ve worked so hard for.
This mindset, while common, is limiting. However, if you can shift and begin to see private equity as a tool to help you secure large amounts of capital and expertise, you may be able to accelerate your organization’s growth.
Add in the fact that, when you work with a private equity group, you can sell your business not just once, but multiple times, and you begin to see what an asset private equity can be when you’re looking for rapid growth and big payouts.
Partner with private equity groups.
The power of partnering with private equity firms cannot be overstated. Private equity has skyrocketed in recent years: Today, private equity firms have over $4 trillion in assets under management and $1.4 trillion in committed cash out looking for companies to buy right now. About 39% of all deal volume today is attributed to private equity, and that number is expected to hit 50% by 2022.
What does that mean for you? First, that private equity investors generally know what they’re doing and are often incredibly successful at it. Second, it’s the marriage of these astute investors with creative entrepreneurs that makes for some of the best, most successful businesses in my experience.
Combine these two things with the effect they can have on your business over the long term, and it’s easy to see how private equity can level up your organization.
When you partner with private equity, you’ll get liquidity. If you’re smart, you’ll also stay invested. That allows you to diversify your asset base while giving you access to resources to scale your business and rise to the top of your market.
Sell your business multiple times.
Getting access to the capital that private equity investors bring is a huge part of building your business. But utilizing private equity to maximum advantage doesn’t end there. Think about it: If your exit strategy involves selling your business once, cashing out and then rolling on to the next thing, essentially what you’re doing is working for years to build a business for one single payday.
Here’s my question: Why start all over to create a new business when you could keep growing the business you already know? Remember what I said at the beginning: With private equity, you don’t have to limit yourself to selling a business only once. You can sell it multiple times.
Let me give you an example. I bought a business from an entrepreneur for $16 million. Despite his initial protests, I asked him to roll over part of that investment into the new company (he took the remaining money as a payout). Initially, he didn’t understand how rolling that money over benefited him. He had been thinking of private equity — of me — solely as an exit strategy. But it became a growth strategy when I was able to sell the resultant business for a four-times multiple of invested capital, and he wound up doubling his own personal take in less than three years.
Maximize your growth.
My guess is, up to this point, you’ve focused on organic growth as the way to build your business. Sure, that can work, but it’s a slog. By partnering with private equity, you can get access to more components for your overall growth strategy.
Private equity investors bring process improvement, margin enhancement and margin improvement expertise. Plus, they utilize mergers and acquisitions by buying other companies that are similar and combining them to scale faster. I’ve found that if you make them your partners over time, they can massively amp up your growth.
So, what’s the potential downside to working with a private equity firm? First and foremost, a loss of control. The majority of private equity buyout funds will want a controlling stake in the company being purchased. This means you will have a boss for what could be the first time in your company’s evolution! Secondly, there is no guarantee that you’ll be able to hit the targets modeled by private equity to achieve the typical average return threshold of three times MOIC (multiple of invested capital) that many private equity firms seek. As with all investment opportunities, past performance is not a guarantee of future returns, so be sure to be diligent with any firm you consider partnering with. With thousands of firms out there, not all private equity firms are created equal.
The key to realizing all the advantages private equity brings is to stop thinking of them as a one-time exit potential. Instead, make them part of your growth strategy. Bring private equity in early, use their resources and capital to help build your business and roll over a portion of the proceeds so you can continue to enjoy subsequent paydays. If you do that, you just may enjoy accelerated growth and a far higher return from the business you poured so much of your blood, sweat and tears into building.