Five Things Most People Get Wrong About Private Equity Funding

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Say you own a business and you need money to grow it, whether it's a start-up or one that's been around for decades. You've probably looked into a variety of funding sources, including conventional loans and private equity, but you may have dismissed the latter based on incorrect information and myths about this type of cash infusion. Here are five things most folks get wrong about private equity funding, so when you make a decision for your business, you are armed with the right information.

Myth #1: Private equity funding is bad for entrepreneurs.

Unfortunately, the media has made a lot out of a few unscrupulous private equity lenders that have gutted the businesses they funded. This gives the impression that private equity always means obliteration for the recipient of the loan, but this is not the case.

There are many private equity lenders that seek to form synergistic relationships with the ventures they fund and prefer long-term partnerships with a bigger return on investment over short-term profits. The key is to do your due diligence and find a funder that matches your goals for your business.

Myth #2: Private equity funders only get one thing out of the deal.

This is a corollary to Myth #1. While, of course, private equity lenders want to make money on any given transaction, sheer profit and takeover are rarely at the top of their list of goals. There are plenty of funders that are interested in developing new business technologies, supporting medical breakthroughs, and seeing fledgling businesses take off. The amount of control and results private equity funders seek vary widely from venture to venture.

Myth #3: Private equity funding is only for traditional corporate ventures, like real estate development and tech companies.

Although many conventional types of businesses do receive private equity funding, they are not the only recipients of this kind of loan. Performing arts companies, art galleries, and even individuals in creative pursuits can receive private equity funding if their businesses can demonstrate the potential for future return on investment.

Myth #4: Private equity funding is only for private companies.

Are you laboring under the delusion that because your company has gone public, it is no longer eligible for private equity? Don't let the word "private" fool you.

Private equity lending is also available for public companies, albeit with a different process. A new business venture is formed with a dissolution of the old publicly held company. With very large public companies, multiple private equity firms may need to pool their resources to cover the company's market capitalization and any other acquisition costs. For businesses seeking a buyout in this manner, it usually takes more legwork to put the deal together.

Myth #5: Private equity funding lets you sit back and do nothing once you have the money.

Unless a private equity firm is buying your business out and replacing all the executives, private equity funding doesn't mean you're off the hook in terms of generating more business or making some growth-related changes. Because private equity lenders are looking for that return on investment, even if it's years down the line, they want to see that you are doing your part to put their funding to the best advantage.

One of the reasons private equity sometimes gets a bad rap with small businesses is that they don't understand the nature of the exchange with their lender. Bad business decisions on the part of the funding recipient or failure to utilize a loan wisely are not the fault of the private equity lender. Business owners must remember that the underpinning of private equity is still the word "equity," and they must offer something in return for the cash they receive.

 For more information on private equity, contact a company like RLS Associates.