Once a private equity investor executes the Term Sheet or Letter of Commitment, the deal enters the negotiation and due diligence stage. Once this stage is reached, deals typically take 60 to 90 days on the low end up to 12 months on the high end to close. As previously mentioned in this book, a well-thought out Private Placement Memorandum (PPM) or similar document prepared in advance by the company’s owner(s) can greatly shorten the negotiation stage.
Private equity firms typically charge 1-3% or more for legal and accounting fees. These fees increase with the complexity of the transaction. If you utilize the services of an investment banking advisor to access private equity funds, expect to pay an additional 1- 2% in fees. The average private equity firm participates less in the management of a company than the average venture capital firm. The companies they deal with have already met or surpassed significant revenue hurdles, have a good plan for achieving additional growth, and have a strong management team. PE firms do not wish to “rock the boat” and interfere with a well-run operation.
To monitor their investments, PE firms typically take a seat on the board and participate in all board meetings, mandate a say in all strategic shifts and decisions, and review quarterly financial statements and monthly financial reports.
When to use private equity funds. If your company has revenues of at least $10 million, growth projections in either income or revenue that equate to 20 to 35% annual returns on equity, you need capital to expand organically (expand through sales and marketing), or you need capital to purchase another company or companies as part of an acquisition strategy, these conditions may justify turning to private equity for capital.
If your business is growing rapidly but your business partner or other investors want out, private equity is a great capital source to buy out your business partners or investors. In the latter case, the equity infusion would be called a recapitalization because you are replacing capital from one source with another (i.e., restructuring your balance sheet), not adding capital.
Copyright © 2014 by Tiffany C. Wright. All of the above is a direct excerpt from the book, The Funding Is Out There! Access the Cash You Need to Impact Your Business. This book will be published by Morgan James Publishing and available on Amazon in August 2014 as the ebook version and in bookstores and libraries in October 2014 as the softcover version. All information is copyrighted. No part of this publication may be used without prior authorization from the author. For an advance copy in softcover format, please visit The Funding Is Out There!