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How Does Private Equity Operate?

By Generational Equity


A few years ago, in order to clear up some misconceptions regarding private equity (PE), the PE industry formed an association called The American Investment Council (AIC). The AIC’s primary role is educational, helping the general public have a better understanding of how the private equity industry operates and how it benefits the economy in general via investing in businesses and helping them grow.

Because, in reality, that is truly how the vast majority of PE firms operate; they exist to invest funds in companies and often then inject capital in them to enable them to grow and expand. Many have very long time horizons post investment and have a vision of growing the valuation of a company both organically as well as via acquisitions, with an ultimate end game of taking a much larger entity public or selling it to another buyer.

Many transactions culminated by equity firms are structured as “partial sales.” This is where current ownership sells 51% (or more) of the current business to an equity firm and then is retained under a new capital structure as a minority owner. Then, at some point in the future, the new business is sold or taken public which then allows the minority owner to “take a second bite of the apple.” This can be quite lucrative if structured properly and managed well.

A good portion of our clients end up participating in a structured event like this even though, at the beginning of our process, most do not have intentions or plans to do so. One of the important benefits of working with a Generational Equity dealmaker is that he or she will typically walk a client through all the potential deal structures that could be possible for an owner. Each client’s needs are unique. We know full well that no two entrepreneurs are alike and, for this reason, every deal we work on requires a dealmaker to truly get to know the client and his/her individual needs.

For many, an immediate exit post sale is the only goal. In a case like this, a partial sale to an equity firm is not a real option. For others, though, especially those that have company growth plans and ideas but simply lack the capital to enact them, a partial sale is a perfect scenario to follow.

Here are a few of our PE success stories:

As you can tell, for each of these business owners, the decision to sell a good portion of their business to an equity firm was based on fundamentals that were determined by the needs of the business to grow beyond the capital constraints facing the existing ownership. As you probably know, often a business’s growth reaches a point where existing ownership is unwilling, due to the risk involved, or unable, due to lack of financing, to maximize its growth potential.

This is where private equity can step in and provide the capital needed for future expansion. This is how the American Investment Council describes the role PE plays:

And here is some interesting research that you might find useful as well to learn more about private equity and how it could work for you:

Another great way to learn about PE funds and how they operate is by attending a Generational Equity exit planning conference. We hold these throughout the U.S. and Canada; they are highly educational and designed with the business owner in mind. In fact, many of our conference leaders and managing directors are past business owners themselves who have successfully exited their companies via an M&A event.

Attending one of our conferences will not only allow you to learn a great deal about all buyer types, it will also allow you to spend time with our team and have one-on-one conversations about your specific needs, both financially and personally.

The reality is: exiting your business is an event that will eventually occur, whether you adequately plan for it or not. We have found that it is far better to take time in advance to prepare both yourself and your business to exit for the maximum profit at the optimal time rather than the alternative, which is when external circumstances force you to exit.

To learn more about our conferences and to determine how you can attend one near you, please follow these links:

Bottom line: When the time comes for you to exit your company, be sure to cast a wide net and evaluate a full spectrum of buyer types.

Don’t make the often-fatal assumption that the only buyer of your business will be a local competitor. Although this may in fact be who you end up selling to, if you start out with that assumption you may be ignoring some far reaching possibilities that could be out there.

Many of our clients who end up using a partial sale to an equity firm as their business exit strategy do not start the process assuming that a PE firm will be the acquiring firm. It is a realization that comes to mind as our deal teams work with them to determine what would be the best fit for the client and the business.

By Carl Doerksen, Director of Corporate Development at Generational Equity.

© 2021 Generational Equity, LLC. All Rights Reserved.

I wanted to write you a quick letter to express our appreciation and our delight on the outcome of helping us through the process of our recent sale. We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.
Terry D. Wickman, President, Keytroller
Michael worked tirelessly, He followed every lead meticulously and urgently to make sure nothing was missed.
Robert Evans, President and CEO of Mealtracker Dietary Software
Your wisdom and experience were invaluable to me during this once-in-a-lifetime transaction.
Ralph Noblin, President of Noblin & Associates
Tom Staszak is one of the most professional people I have dealt with in my last forty years of business. You’ve got a great group of people and you have built a truly professional organization.
Michael J Polarek, President, Paragon Packaging
Generational Equity’s assistance was invaluable in compiling and marketing our business.
Bil MacLeslie, CEO, ipHouse
I must say that I have never worked with a more driven, competent and focused individual as Don Ho.
Jay Dinnison, Owner of Sharpe Mixers
I quickly recognized that Don was working for Sharpe Mixers above all else, and held our interests above others.
Jay Dinnison, Owner of Sharpe Mixers
We thank you Eric and Generational Equity making our dream come true.
Larry Moore, Owner, A Company Portable Restrooms
I would like to thank you and your firm, Generational Equity, for being our valued advisors in our journey.
Bil MacLeslie, CEO, ipHouse
Generational Equity educated and informed us – so that we could be on the upside of a good decision (to sell).
Bil MacLeslie, CEO, ipHouse
Thank you again for all your guidance and support. Any company will achieve what they intend, if they have you on their team!
Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
The help you provided us during each step of this process made us feel very comfortable and confident we were selecting the right approach to transition our Company.
Andy Graham, Vice President, Modern Heating & Plumbing
T.D., thank you so much! You are a great leader! I love how you are using your gifts and talents to better others. You are clearly a GREAT COACH! This 3 day session undoubtedly changed the future of our business, and very well may have been the sole catalyst to save my company, my health and my marriage! A genuine “thank you” from the bottom of my heart.
Bryan D. Horn, Owner, Over Under Clothing
We are extremely pleased with the way Generational Equity handled the sale of our company. Your associates, Tom and Chris, did an outstanding job of getting us (me) through the process.
Michael J Polarek, President, Paragon Packaging
I am pleased that I was able to work with Andrew Byrd throughout this experience. From the first meeting we had in Minneapolis I felt that I was in good hands. His knowledge and expertise is second to none. He guided the process consistently throughout. I feel lucky that I was pared with Andrew and could not be happier that I chose Generational Equity to handle this major life event. Thank you Andrew and GenEq for everything!
Eric Erlandson, Owner, Action Fastenings, Inc.
We were happy to see the interest in our company and what we cherished has not just a valuable company but an important company to the communities we served in.
Larry Moore, Owner, A Company Portable Restrooms
The process was much more involved than I expected and your help, experience and advice was a big factor in making the negotiations go as smoothly as possible.
Terry D. Wickman, President, Keytroller
I couldn’t have asked for a better team than Michael and Deborah. We couldn’t have done it without them.
Robert Evans, President and CEO of Mealtracker Dietary Software
We knew it would be a difficult task to have someone really understand our business and our market, prior to researching a possible buyer, so it was imperative that we found someone of your caliber, with definite proven experience in this area.
Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
We will highly recommend Generational Equity and Musa Jagne to any business owner about to embark on the same process.
Karen S. Williams, CFO, BW Manufacturing
Thanks again Phil and feel free to have a future client call me if they would like a referral. You are a true professional!
Andy Graham, Vice President, Modern Heating & Plumbing
Greetings Mike. Thank you for the captivating and compelling presentation you made at the Phoenix presentation last week. Over many years in business yours was the most informative and well-presented presentation, on any subject, that I have ever attended! Your energy and enthusiasm combined with your concise and captivating support of your positions with easily understood examples and data was compelling.
Pete L.
Bruce and I wanted to take this opportunity to thank Generational Equity for assigning Musa Jagne to our transaction. In Bruce’s words, “Musa did one hell of a job for us!”
Karen S. Williams, CFO, BW Manufacturing
Dear Chris and Andre, I just wanted to say thanks for all your help. Even though this process was not an easy one, it was comforting to know that I had a capable team standing beside me. You made me feel like we were almost your only client or at least the most important one. Thanks again, and I will recommend your service in the future.
Shenille Engelhart, Owner – CLS Technology
We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.
Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
I need to say an immense thank you to Don Ho for his stellar work ethic, attention to detail, and tireless effort. Also thank you to the whole crew at GE! Without you, Don could not do such a phenomenal job. We were shooting for closing and funding before the end of 2020, due to the uncertainty of the political landscape and taxes. I am happy to report we closed last week and will be funding tomorrow.
Dr. Caty J. Catron PhD, RN, VA-BC – Owner, Vic The Picc, LLC