Owners who hope to stay involved should remember that most private equity firms want a controlling stake. For some founders, becoming employees of the companies they created is fine, if that’s what it takes to grow. For others, it’s intolerable.
“It’s not my experience that private equity companies care about long-term value, because they’re not in it for the long term, so it just wasn’t in my nature to stay on,” said Alan Newman, who started Seventh Generation, a distributor of household and personal care products, in 1988 and helped found Magic Hat, a beer company, in 1994.
He walked away from Magic Hat when his partners sold it to a private equity firm in 2010. For Mr. Newman, Magic Hat had never been entirely about profit. “My vision was always creating this really cool, interesting company where people really liked work and we had an impact on our community,” he said.
John Warrillow, a serial entrepreneur and the author of “Built to Sell,” put it in blunter terms. “Provided your goals are aligned with theirs and you go into it with your eyes wide open, that is fine,” he said, “but they are not going to care about the soul of your company.”
DO YOUR HOMEWORK. When considering a deal, entrepreneurs should run background checks, call a private equity firm’s former clients and speak to members of corporate boards where the firm’s investors are active. “I’m doing diligence on you, you should do diligence on me,” said Michael A. Smart, the managing partner of CSW, a private equity firm in New York.
A private equity partner should bring deep industry expertise, fresh connections and experience in tapping new markets: in short, more than just money. Troy D. Templeton, managing partner at Trivest, a firm in Coral Gables, Fla., that invests in founder- and family-owned businesses, said smart business owners should ask the following kinds of questions: Do the investors add value? Can they do things I could not do — introduce me to new markets, help me source products from different areas, help me with online lead generation, bring me into the digital age?
For an entrepreneur who finds the rare match of capital, talent and cooperation, the benefits of private equity can be considerable. “They’ve got so many insights you can’t even pay for,” said Ryan Eleuteri, owner of the Charleston Beverage Company, which sells premium bloody mary mix.
Last fall, Mr. Eleuteri teamed up with Duart Mull, Mr. McLain’s firm, which brought capital to the company — both equity and debt — and now owns 30 percent of it. With $50,000 in revenue for all of 2010, Charleston Beverage was an unusually small candidate for private equity. Duart Mull “generally seeks companies that have a developed product and customer base,” Mr. McLain explained. “Albeit small, Charleston Beverage met these requirements.”
As for his decision to purchase a minority stake, he said, “We are doing this, in part, so Ryan and the other founders can retain majority ownership, because we want them to be motivated and incentivized to grow the company versus feeling like they are working for the investors.”
Mr. Eleuteri said his new partners helped him expand distribution. He now expects $250,000 to $300,000 in sales for 2012.
“I get to operate my business every day as a small-business owner, but if an issue arises, they’ve got a vested interest in my success,” Mr. Eleuteri said of his partners. “It’s almost like having a big brother watching out for you. You get in a schoolyard fight and it’s like, ‘Do you really want to do this? I’ve got my 6-foot-4 linebacker brother behind me.’”
But for Mr. Mehta, the entrepreneur who said he was burned by private equity, there is no going back. He swore off outside financing altogether in his current endeavor, a start-up called Local Marketing Inc., which he said was profitable and generating several million dollars a year in revenue.
“Now we basically get approached by a bank or a company every month to give us money,” he said, “but we don’t need it.”