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What is a Private Equity Firm

Jan 29, 2008
Has your company been considering expanding? Not sure traditional funding is for you? If you have a viable business model why not consider a private equity firm to help your company?

What is a private equity firm you ask? A private equity firm will work with you to find venture capital from private sources. Small business can raise capital to expand and grow their business by using a private equity firm.

In fact, private equity firms are a significant source of funding even for start up funds. They invest in a business solely on the strength of the business plan and an early trust that builds between the two parties.

What exactly is private equity you ask? Private equity funds invest in small to mid size companies who they believe can grow their revenues. They invest for the long term and are looking for both cash flow and dividends. They will buy up the equity from any other shareholders allowing the founders and early investors to recoup some of their original investments from the company.

A private equity firm requires some specific criteria before providing the equity to your business. Here are just a few of the criteria they require.

1. Security - they want collateral or assets against the capital, which gives them a sense of security towards their investment. They generally also want a seat on the board of directors, which gives them a sense of control.

2. High Rate Of Return - they look for a high rate of return on their investment. Sometimes it's in the form of a cash return, other times they are looking for perks like being the director plus cash. It lets the investor feel as if they have some control over how their capital investment earns money.

3. The Risk - the investor will want to know what the risk is and although investors are willing to take some risk, they are also looking for a realistic business plan that has realistic profit goals.

4. Exit Route - the investor will want a plan called an exit route to which he/she will retrieve their investment. This builds confidence that you have thought through how the repayment will occur.

5. Trust - all the business plans in the world won't make up for trust and trust will be built on a few things such as your credit rating being good, your business skills, and just how enthusiastic you are about your business.

6. Realistic - an investor will want realism attached to the optimism and he/she will want your goals and your projections for profit to be realistic. That includes paying yourself a realistic wage.

A private equity firm is like the middleman. The company solicits investors that are willing to put up capital and venture capital. They have a host of resources on hand at any given time. You approach them with your business plan and the request for venture capital. They will then decide if they feel your proposal is viable. If they feel it is they will match investor to project and then details will begin to get hammered out.

Now that you know what a private equity firm is, if you are ready to expand your business you might consider soliciting their services.
About the Author
Terry Fitzroy is a private equity writer, with experience in Utah private equity and Utah venture capital .
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