Is Private Equity good for small business stakeholders?

By John Lindsay, FLMI MBA

Private equity funds are almost a fashion statement? today, no business owner wants to be left without them as a stakeholder. But as always what’s popular on Wall Street does not play well on Main Street.

Here is a short list of Private Equity stakeholders:

A)??? business owners looking for an exit,

B)??? remaining business owners (usually those with minority holdings),

C)???? the private equity firms who choreograph the buyout and

D)??? investors who are attracted to the higher yields that private equity firms promise for equity buyers.

Here is how it works A) gets an offer which is a low multiple of net earnings. The owner accepts not because it is fair but because the amount of dollars is sizeable enough that the owner thinks he/she can do ok? after what is left when capital gains taxes are paid. The capital gains tax payment sent to the Income Tax Department usually has six zeros written in.

The B) group now have to work like dogs to pay back the debt (and keep their jobs) to the private equity firm. The B) group uses after tax dollars so this results in more tax and interest on top of the equity payments which decreases the financial strength of the firm over time. The B) group ends up on the short end of the stick and hope that when the private equity firm sells the firm in the future, they are on the sunny side of street after years of financial weakness is forced upon them.

The C) group are in complete control and get lots of fees, good for them. Have a look at this eye opening very well produced and narrated YouTube video? by a lawyer in the private equity industry. Why Private Equity SUCKS for (almost) Everyone (youtube.com) This YouTube video with Warren Buffet cements the first one. Warren Buffett: Private Equity Firms Are Typically Very Dishonest (youtube.com)

The D) group provide capital without guarantees and hope the future sale puts them on the sunny side of the street.

All of this is part of the financial industry landscape and stakeholders must be wary. Our firm provides investors with access to funds that come with double digit returns, guarantees and no fees.