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How Does Private Equity Operate?

By Generational Equity

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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.

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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.
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Larry Moore, Owner, A Company Portable Restrooms
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We had the pleasure of working with Mr. Ahmad Behjati Managing Director, M&A, for Generational Equity during our acquisition of Papa's Dodge in late 2021. Generational Equity and Mr. Behjati represented and marketed Papa’s Dodge. As our primary contact, Mr. Behjati was professional in every facet of this acquisition process, conveying valuable advice most times and assisting us in every step of the process.
Rick Greene of Dobbs Equity Partners LLC
I decided to attend the conference and hopefully receive some guidance on how to structure an exit plan of my business. Upon arriving at the conference, I was so impressed with the presentation given by Generational Equity that I set a future appointment that week to discuss the possibility of selling my business with their Senior Managing Director David Robinson.
JoAnn Ellis, Owner of Fondren 5 Star Kennels
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Jay Dinnison, Owner of Sharpe Mixers
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Eric Erlandson, Owner, Action Fastenings, Inc.
The professionals at Generational Equity then helped develop a roadmap for enhancing the value of the firm and an evaluation report. This was completed by June 14, 2021. We then developed the Confidential Information Memorandum and put Taylor Studios, Inc. on the market by July.
Generational Equity’s professional staff helped me every step of the way. Their network and professionals are the only reason I sold my company this quickly. For me this is a once in a lifetime sale and I was unfamiliar with the process. I was able to lean on them with questions and concerns.
Betty L. Brennan, President, Taylor Studios
Through the sale process, Generational brought in several interested buyers and we closed in about 6 months. I am so glad I accepted that invitation to the conference and could not be happier with the whole process. The team at Generational coupled with their knowledge and guidance was so valuable that in the end, I know I could never have done this on my own!
JoAnn Ellis, Owner of Fondren 5 Star Kennels
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Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
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Terry D. Wickman, President, Keytroller
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Robert Evans, President and CEO of Mealtracker Dietary Software
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Tom Currier, Former President & CEO, Rackmount Solutions
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
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.
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Larry Moore, Owner, A Company Portable Restrooms
We were represented by Michael Goss with Generational. The due diligence was grueling and exhausting, but Michael propped us up and kept us motivated throughout the process. Debi and I continued to ask each other how we could possibly make it through this process without the assistance of Michael. Michael's professionalism and knowledge is absolutely amazing, and we are so blessed to have had him by our side as we made our future dreams come true.
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Caroline Connelly, CEO, OptoTest
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Bil MacLeslie, CEO, ipHouse
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Robert Evans, President and CEO of Mealtracker Dietary Software