Why would a company partner with a private equity firm?

Let's say two brothers start a business in their garage...

They make shoes by hand.

Every week, they load up the car with shoes and try to sell them to local stores.

A few stores like the shoes and before you know it they've got customers.

So they make more shoes, but now they've got some problems:

— it's hard to keep track of the inventory
— they're not really "numbers people"
— they can only visit so many stores each week

So they hire employees who help them:

— track the inventory
— keep the books and pay taxes
— sell to stores they don't have the time for

Fast forward 10 years...

The business is doing really well:

— their shoes are in some national stores
— they have a warehouse for manufacturing
— there are several employees

The brothers talk to their bookkeeper and it turns out the business did $20 million of sales last year.

They have a chat:

Brother 1: "Holy crap! Remember when it was just us in the garage??"

Brother 2: "Unbelievable. What do you think this thing is worth?"

Brother 1: "What's it... worth? I have no idea."

Brother 2: "Is there a way we can keep the company but take some chips off the table? I want to keep working, but also have my family to think about, and truthfully I'm not sure I know which stores to go to next."

Brother 1: "Hm, yeah, and honestly we need a bigger warehouse if we want to expand and the bank wasn't ready to give us a loan last year."

Brother 2: "We could really use a partner who knows how to take the business to the next level — I'm talking bigger national customers, access to financing without headaches, and recruiting some experienced people to help us grow — we've made it this far but we're just not experts at that stuff."

Brother 1: "I think we can talk to a private equity firm?"

This is where private equity enters the scene. The firm will:

🟢 Value the brothers' shoe business (and they determine it's worth $24 million)
🟢 Buy 51% of the company and let the brothers cash out ~$12 million today
🟢 Structure a deal where the brothers still keep 49%
🟢 Get debt capital for the business to help it grow
🟢 Find a CFO and other strategic new hires (sales, etc.)
🟢 Help it access larger national accounts (with the help of advisors)
🟢 Work together over the next 3-7 years as partners
🟢 Hopefully grow it to $100 million+ in sales
🟢 Sell the business again (and the brothers get to cash out again)
🟢 The brothers can choose to keep going with the new buyer or retire if they're ready

The big tradeoff and why it works — in exchange for half their business:

🟢 The brothers get to do what they love: shoemaking and selling to customers (what they're best at)
🟢 Take some cash out today and secure their futures
🟢 Let the private equity firm open new doors and share the growth burden
🟢 Still participate in the future upside

Private equity unlocks opportunities they couldn't achieve on their own.

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