Myths vs. Facts: What Do Private Equity Firms Do?


If you have ever looked into selling a business, you may have learned that there are many types of buyers and deal structures, from employee buyouts, strategic acquisitions, to private equity firms. To make the right decision for you and your business, it is essential to have relevant and accurate information about your own business and the types of buyers available. 

We have noticed many misconceptions about a particular kind of buyer: the private equity firm. Of course, a private equity buyer may or may not be the right fit for you, but these common misconceptions can deter an owner from considering what may otherwise be a viable option. This article hopes to dispel some of the most common myths about private equity buyers and what private equity firms do. 

What Do Private Equity Firms Do?

Private equity is a type of private financing that involves funds and investors directly investing in companies or buying owners out of their companies. Professional advisors with strategic operating experience manage private equity funds. Business investors frequently seek out organizations with development potential, and the investment enables the organization to meet its short-term financial objectives and realize its full potential.

6 Common Myths about Private Equity Buyers

Myth 1: Private equity is the same as venture capital.

Private equity is not the same as venture capital. Venture capital funds typically invest in newer and smaller businesses, such as start-ups or tech companies. However, private equity funds invest in more established enterprises with a track record of profitability. In addition, private equity focuses on leveraged buyout (LBO) of businesses that have proven business models but require financing and a new strategic direction to advance.

Myth 2: They will replace my management team and fire my employees.

Private equity firms will not typically replace the management team and fire employees because they know the current management team is knowledgeable about the company and the industry in which it operates. They generally see that the original value of the company that interested them is mainly found inside its current workforce and team. These firms do not “win” by bankrupting companies or laying off their employees. They make money by assisting businesses in becoming successful – and no business can prosper without its employees.

Myth 3: They are only interested in companies in distress.

For the most part, private equity investors are searching for enterprises with established capability and cash flow, so they can make a return on their initial investment, secure financing from investors, and double or more the size of the business over the course of the investment. However there are some private equity firms that specialize in buying struggling businesses, turning them around, and then reselling them for a profit, but this is not typical for the standard private equity group. 

Myth 4: I will lose all control of my company.

Nowadays, investors are more than happy to structure deals that make sense for both them and the current owner. If a current owner is seeking to partner with a private equity group but still keep control of their company there are firms that will take minority stakes in the company, with the former owners still in charge. Unless management has problems, investors typically prefer not to participate in day-to-day operations. If a business happens to be on the small side, there is a chance that a minority stake will not be suitable for the investor, but again, this depends on the company and is not a general expectation.

Myth 5: They are only interested in high-tech sectors.

Private equity buyers are active in most sectors of the economy, including some very traditional sectors. They are interested in businesses in any industry that can show potential for a robust return on investment over time.

Myth 6: A private equity buyer will limit my exit options.

When working with a private equity buyer, you retain a broad range of options for your exit. Therefore, going into a private equity agreement with a clear sense of your desired exit strategy is advantageous. Many owners and entrepreneurs who see private equity as a viable path to growth have seen considerable returns through various exit strategies.

No matter what type of buyer you may be considering, as the business owner, you have the essential insight into what the best option will be. At Viking, we understand that no one knows your business as you do. That is why we come alongside business owners to help provide additional relevant and accurate information, and we strive to provide top-notch buyers that can deliver the result you desire for yourself and your business. If you are considering selling your business, contact us today for a no-cost, confidential consultation.