Running a business is no easy task and one made even more difficult in a competitive market. Many entrepreneurs lack business acumen and do not know how to properly manage their organization, even if they have a great product. Here, operations expert Douglas Battista explains the importance of private equity firms, a type of investment entity often discussed in the media.
Q: How does private equity work?
Douglas Battista: Essentially, a private equity firm is a group of investors that pool their money together to provide working capital for new or underperforming companies. The investors gain equity in the company and earn a profit only when the business’ performance improves.
Q: Why are private equity deals important to the economy?
Douglas Battista: Private equity is often used to pull an existing business from the brink of failure. Even well-known companies such as Snapple and Orbitz have benefited from private equity investors. When an equity investor steps in, the primary goal is to turn the failing business around. In doing so, the investor saves jobs and helps create a better product or service. The business owner gains a valuable ally and access to more experienced business professionals.
Q: How is seeking private equity different from filing for bankruptcy?
Douglas Battista: Typically, bankrupt firms are those that have “gone under” and are no longer in active operation. A firm purchased under a private equity deal still exists and has the opportunity to grow.
Q: In a private equity firm, who decides what business to invest in?
Douglas Battista: Equity firms are made up of partners, either corporations or individuals, who decide together what companies to “bail out.” These are carefully planned decisions based on hard facts and data. Private equity funding is considered high risk since the investors are the last to see a profit; creditors are repaid before equity partners.