Ownership or partnership? Rethinking what private equity investment could mean for your business

Private equity has become a popular value-creation tool for investors interested in nimble operations and high returns, especially when applied in founder-owned businesses.

These businesses, after partnering with a private equity firm, are often augmented with additional talent who bring deep experience in heading both organic and inorganic growth. At Charles Aris Transaction Services, we spend 100% of our time connecting private equity firms with founder-owned businesses, and the most common tripwire we encounter is skepticism from current business owners regarding the role investors will play following a transaction.

Many founders have spent years growing their business and aren’t ready to transition out, or they don’t trust a private equity firm to uphold their vision. These concerns are valid, and they stem from the common misconception that ownership and partnership are mutually exclusive following a transaction.

Below, we’ll outline a common narrative regarding transactions between private equity firms and founder-owned businesses and explain an outcome we see more regularly:

The narrative versus the reality:

Founders engaging in a private equity transaction often worry they will be taken off the team, but the best private equity firms will position these individuals to serve in a capacity they’re comfortable with moving forward. Their goal is not to simply buy out the founder, it’s to form a partnership that allows both parties to learn from and grow with one another.

The common narrative surrounding private equity investment is that a founder will agree to a 100% sale, exit the business entirely and the firm will pivot the company in a new direction. In reality, there are a diverse range of options for founders during and after a transaction. A common scenario we’ve seen work well is as follows: founder agrees to partial sale > founder makes partial exit > founder and private equity firm engage in strong partnership > founder gains confidence in business success and stays involved as needed.

The partnership involved during a private equity transaction is an important part of this equation. Instead of being pushed out, founders are often brought in and offered a catalog of resources to spark growth – and paid well to accept them.

The perks of partnership:

Founders should evaluate transaction opportunities as a means of gaining access to new resources. Instead of handing over the keys to the kingdom, they’re more often handed needed growth drivers for their business. Here are a few benefits we’ve seen private equity firms offer founders following a transaction:

• Dedicated M&A talent to assist with inorganic growth
• Extensive CEO network for collaborative idea exchange, often facilitated by private equity platforms
• Access to operational resources on demand
• Advisory board to serve as trusted group of partners and hold leaders accountable for growth ambitions
• Community of like-minded founders who are open to discussing what they’ve learned during an acquisition
• Ability to de-risk personal wealth by withdrawing a portion of equity from the business

These benefits, coupled with the founder’s ability to dial their boots-on-the-ground involvement to their liking, are what makes private equity investment so successful for its stakeholders.

The takeaway:

Even the most open-minded founders have the right to be skeptical about private equity, but the idea that engaging with a private equity firm involves stepping away from your business is a common misconception. Private equity firms should be viewed as business-scaling tools. Ownership is certainly a part of the equation, but the partnership founders forge with their private equity sponsors is what allows their business to break through new growth ceilings.

Want to learn more about our transaction advisory services? Contact Sean Curley at sean.curley@charlesaris.com or (336) 217-9125.