How do Private Equity Companies Help To Sell Your Business?
March 26, 2021
Private Equity refers to ownership in an entity that is not publicly traded or listed. Since these funds are private, their capital is not listed on the public exchange. Private Equity acts as a great investment option for high-net-worth individuals and institutional investors to directly invest and acquire an equity stake in companies. Private Equity companies require direct investment to buy equity investment in companies that require a substantial amount of money and the investors must have a solid financial background.
How Does Private Equity Work?
Private Equity companies generate money for the investor, from the investment in different types of assets by institutional investors and certified investors. The most common types of private equity funding are listed below:
- Vulture Financing: Also known as Distressed funding, money is invested in underperforming or troubled business units or assets. The motive behind this type of investment is to make required changes in the operations and the management of the business unit that results in increased revenues and profits. Companies that have filed for bankruptcy are often chosen for such type of financing.
- Leveraged Buyouts: The process involves buying out a company completely or with a majority portion of it to transform its business and financial health and later reselling it for a profit to an interested buyer or through conducting an Initial Public Offer (IPO). A combination of debt and equity to finance the transaction is used in the process.
- Real Estate Private Equity: Investing in Private Equity real estate requires long-term investment outlook and significant upfront capital commitment. This type of funding allows high-net-worth individuals to invest in equity and debt holdings linked to real estate assets.
- Funds of Funds: In this type of funding the primary focus of investments is into other funds majorly mutual funds and hedge funds. The aim of this type of investment is diversification and proper asset allocation. The portfolio contains a diverse fundamental portfolio of other funds.
- Venture Capital: In this type of private equity funding, the investors provide capital to entrepreneurs. Venture capital can be provided at various stages of a business. Investors, when providing the capital to convert a prototype into a product or service is known as seed financing. Early-stage financing helps the entrepreneur to grow a company, while when capital is provided at the later stages it can help to compete in a market.
Process of Selling Business to Private Equity Company
Selling out the business to a private equity company is one of the popular methods to provide quick exit and recovery of funds. The businesses looking to sell out their company have to undergo the following process:
- Stage 1: In this stage, the seller approaches the private equity company, and disclosure of the financial and operational status of the business should be provided. If the Private Equity Company is interested in the business unit, they will initially offer a Letter of Intent (LOI). This Initial offer will be based on the approximate value of the company. The offer comprises investment value and is generally higher than the actual worth of the company.
- Stage 2: If the business agrees to the Letter of Intent offered by the Private Equity Company, then it conducts its due diligence. It is the process where an in-depth analysis of the business and financial records is done. All the records of the business dealings, profit and loss statements, cash flow statements, etc. are thoroughly analyzed to ascertain the actual worth of the business.
- Stage 3: The above stage can take between 60 days to 6 months depending on business to business. Once the due diligence process is completed, the deal is finalized. Private equity companies in general cases provide 70 percent of the value in the bank account of the business and 30 percent of operational stake still lies with the owner. Private Equity Firm offers a management contract to the owner of the business for their operational involvement. However, if the owner fails to meet the expectations of the company then the private equity company gets the complete hold of the business.
Private Equity Company Fees
The fee structure of Private Equity Company comprises management fee and a performance fee.
- Management Fee: The management fee is about 2 percent of the total committed capital that is allocated for investment in the fund. The fee includes the fund’s operational and administrative expenses that are required to run the fund such as salaries, deal fees, etc. The management fee is charged even if the fund does not yield profits.
- Performance Fee: A performance fee is the percentage of the profits generated by the fund. This fee can be as high as 20 percent on the fund providing a positive return.
Resurgent India’s Approach on Private Equity
Resurgent India is a renowned and trusted name in Investment Banking and Merchant Banking Industry. The company holds expertise in advisory and implementation of Private equity transactions across numerous sectors. The company holds strong relations with international private equity players and understands the investment needs of the financial investors. Their panel of financial experts helps in executing the entire process from identification, initiation, structuring, valuation, and execution. Resurgent India has a proven track record of successful buyouts, distressed financing, mergers & acquisitions, capital restructuring, private equity funding, venture capital, equity planning, etc. The brand believes in keeping the interests of sellers and investors in mind, and offers win-win solutions for both parties.