Need to know: private equity

PRIVATE equity does not have a great reputation. Entrepreneurs talk about private equity offers as if they were Venus flytraps: the firms lure you in with the promise of capital and then before you know it you are trapped under their control. But at a time when bank loans are hard to come by, small businesses need to explore all the credit options available to them. Here we have listed three things you must watch out for in order to make sure you don’t get trapped.

1. UNDERSTAND THE RELATIONSHIP
When it comes to fleshing out a private equity deal it is important to be fully aware of what you are getting yourself into. Even if the firm wants to keep you in place, your role will change. You need to look out for this during the negotiation process since it may not be obvious from the very beginning. Joe Bedford, a partner at law firm Stevens & Bolton, says: “Entrepreneurs often don’t realise that certain clauses in the agreement will change their role. They will be held to a new business plan and in a new decision-making structure.” It is best to consider the agreement in these terms in order to really understand what you are getting into.

2. DO YOUR DUE DILIGENCE
Private equity firms will do their due diligence and require references from you. Be prepared for this and take the same rigorous approach to assessing them. Jana Klimecki of the consultancy Tyler Mangan says: “Entrepreneurs should be pragmatic and take time to ensure an investment is the right fit for their company.” She suggests that you should take references on them and display attention to detail. Klimecki thinks that there is a proliferation of capital in the private equity world at the moment, so it might pay to be fussy – they need you too.

3. TYPICAL PROBLEMS
Oscar Horwich, an associate at Stevens & Bolton, says that the levels of protection for the private equity companies often surprise small businesses: “The investor will introduce a level of formality to the business. They will insist on monthly or quarterly management notes and are likely to take away the owner’s ability to pay bonuses or change share arrangements without consulting them.” Small businesses will find their relationships with their investors easier if they understand these issues from the outset.