Private equity is a seller’s market because our potential investees are already very successful and consequently attract many alternative offers. As with most negotiations though, the key to providing the best offer is to understand what the other guy is actually offering. We need to understand private equity options.
The problem is that the other guy is often no guy at all. That is, a business may decide to fund its growth using its own cash flow. Such businesses understand private equity is an expensive proposition (i.e. a high cost of capital), so they don’t see the logic in employing external funds if they already have the funds. This may sound somewhat limiting, but with millions of dollars of free cash flow and significant borrowing capacity, most successful businesses can do quite well without external investment.
However, there’s always the what if scenario: what if we had unlimited funding and what if we could achieve world domination? This is where private equity options enters the fray. With virtually unlimited capital and an extended team of highly experienced businessmen, there are fewer limits; the sky is the new limit. Additionally, it’s human nature (and the nature of most entrepreneurs) to become more excited about potential upside than potential downside.
So, the decision often comes down to the volume of that niggling voice. The voice that brings dreams into the scope of reality. The voice that feeds an entrepreneurs voracious appetite for risk and adventure. The voice that ignores the size of your offer and currency of your attire. It all comes down to an irrational voice.