Free Enterprise - The FindLaw Small Business Law Blog

Small Biz and Private Equity Don't Always Mix

Private equity may seem like an appealing solution to many small businesses. After all with many banks tightening up their policies, a private equity investor could be the only way for a small business to get much needed capital.

However, seemingly fast and easy money from private equity investors can have its drawbacks.

Some small business owners unprepared for the world of private equity have found themselves losing control of the companies they worked so hard to create, reports The New York Times. So how do you know when private equity may be good for you?

Here are three tips every small business owner needs to consider before accepting private investor money, as written by the Times.

  1. Know your investors. Private equity firms are in it to make money. While some may appear paternal and act as your mentors, don't forget that the goal of every private investor is to make money -- and to make it quickly. Making money is a worthwhile goal, but you should know in advance that the profit-motive can cloud every other goal you had for your company.

  2. Know what you want. Your goals should be aligned with the private equity investor. Most private equity investors take a controlling share and they could gain a deciding vote in the direction of your company. If you're looking for short-term profits and to cash out as quickly as possible, private equity investment could be perfect for you. However, if you have long-term goals that don't necessarily jive with making lots of money, private equity may not be right for you.

  3. Do your homework. As with any other business deal, you should properly vet the investors. Know the types of deals they've been involved with and how those deals ended up. Some private equity investors have lots of experience in certain areas and can provide invaluable insights and connections for your company. In other cases, a private equity investor could have no idea how your business works, setting up bumbling, ineffective moves.

Small business and private equity don't always mix well. Keep these above considerations in mind when deciding if you really need private equity.

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