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Pros and cons to private equity for small businesses

Private equity firms have been in the news a lot recently, as presidential contender Mitt Romney's history in the industry is examined. Although Mr. Romney's tenure at a private equity firm has been exhaustively covered, many small business owners don't know a lot about the role of private equity and how it could affect their business.

The role of a private equity firm is primarily to provide the capital necessary to make improvements and grow the company that they invest in. Along with this, equity firms often make a number of other changes as a part of the investment deal, depending on the terms of the contract. Creating a board of directors, hiring new executives to help transform the company, and reorganizing for great efficiency are all possibility when one makes a deal with a private equity firm.

In order to get the best results from private equity, small business owners will want to consider a variety of factors before choosing investors and signing a deal. One major issue to ponder is what role the owner will want to play in the business going forward. For owners that are interested in selling within a few years and are ready to hand off more control to growth professionals, private equity might be a good choice. However, some owners wish to stay with the company and want to maintain more significant control during the term that the private equity firm is investing for. In those cases, it's important to have those conversations upfront and try to negotiate the best arrangement before the firm invests.

Source: New York Times, "What Small-Business Owners Should Know Before They Take Private Equity," Jessica Bruder, August 15, 2012.

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