Keeping Control

It can be a comfortable relationship—as long as the primary owner never loses sight of the private equity group’s motivation. The groups make their money when they sell, and they only realize expected profits if businesses grow substantially during their investment terms. “You can’t have the business on idle,” Kampe says. “They want to know how the company is going to grow and how they’re going to get their expected return. You’ll be giving them a seat on the board, and they’ll want regular reports.”

As a result, private equity firms will only let a majority owner run the company without interference if that arrangement yields an expected growth rate. If the business hits a rough spot, a minority investor may try to change the company’s management team. If the majority owner resists these efforts, there will be conflict.

“Some are more patient than others,” Griffith says. “Some, at the first sign of a hiccup, might be quick to judge you and your management team negatively.” Their ability to change company management depends on the percentage of the company they own and the number of board seats held by outside investors.

Majority owners must also be mindful of potential difficulties when the private equity group sells its interest—maybe to another private equity group, or perhaps to an industry competitor. If a business owner wants to sell the entire business at this point, then business and investor interests are aligned, with both looking for the best financial deal.

A business owner who plans to stay on, though, may have a strong interest in having another private equity group as an investor. But the initial private equity investor will ultimately sell its interest to the highest bidder. “If a strategic buyer is at the table and is willing to pay $100 million, and the private equity group is willing to pay $60 million, the original private equity group is going to push you toward the $100 million,” Kampe notes. “And that may affect whether there’s a place for you and whether your employees keep their jobs.”

That’s a lot of power for a minority investor to hold over you and your company. In return for it, make sure the investor you choose offers more than just money. “There might be five different groups that offer you the same economic deal, at least on the front end,” says Knopf. “Look past that. It’s a little like a marriage, and it’s so important to understand your partner and their investment goals.”