The Private Equity strategy to earn generational wealth as a small business owner

One company, multiple paydays

Dear Investors,

It’s time to talk about how owners of companies and employees at companies can create massive wealth with private equity.

Sincerely, Raj

Today we are going to talk about how to create life-changing wealth, while growing your business.

Most small and medium sized business owners never think about getting investors as business partners. To them, their company provides a job, they love it, they don’t want a “boss” and they have hopes of letting their kids take over.

The problem is that most small companies never become big companies. And if your company is small, you miss out on all the benefits of size, which includes higher company valuations and the chance to earn generational wealth.

In this edition, we will look at:

  • What do private equity investors want?

  • What does working with private equity look like?

  • How to think about the private equity opportunity

What do private equity investors want?

Private equity investment funds are always searching for companies to invest in. They make their money by buying a piece of a company, growing the earnings of the company and eventually selling their stake at a profit.

Private equity funds typically have a lifespan of 10 to 12 years and during that time they will likely be invested in a company for 5 to 7 years.

Private equity funds are looking for:

  1. Companies that are growing. They need this growth so that over the lifetime of their investment in the company, the earnings will grow. Then they can sell the company at a profit.

  2. Companies that are well run. Well run companies, but not perfectly run. Companies with a few problems are likely to be for sale at more reasonable prices. With time, effort and skill the problems can be fixed, which naturally increases the value of the company.

  3. Good management. Obviously, to make the magic happen the private equity fund will have to partner with owners and management for the lifetime of the investment.

What does working with private equity look like?

When a private equity firm buys into your company, they become your business partners. Typically, they will join the board of directors of the company and help to implement professional governance and running of the business. You will be appointed as Chief Executive Officer (CEO).

Owners sometimes don’t like this. They see the board as a “boss” telling them what to do. That is not really the case. Private equity firms don’t usually tell you what to do. Sure, their voices are heard and opinions are shared, but they will not be micromanaging you. If they are, you got the wrong investors and they bought the wrong company.

When I meet with business owners, I remind them that we won’t micromanage them. I say it straightforwardly “if I have to tell you what to do and how to do it, then I backed the wrong management team”. They usually laugh and agree.

- Raj

However, as the CEO of the company, you will be accountable to the board. You will have to report back on the financial, operational and strategic goals that the board has set. Sometimes, if you are going offtrack, they will guide you back on course. If you don’t perform, the board can also fire you.

So it’s a matter of perception. If you don’t want to be accountable to anyone, the board will be the bane of your life. If you appreciate input (and can put your ego aside), the board will be a great asset and source of strength for you.

How to think about the private equity opportunity

Many founders see private equity as a one-off sale of the business which they have spent a lifetime building. One chance for a big payday that they have to maximise. That is why they find private equity so threatening.

But in the most successful private equity deals, the founders do not think of it as one payday, but rather as the start of multiple paydays.

Once a company has been acquired by the first private equity fund, it will be held for about five years and then has to be sold to other investors. Often these other investors will be from the private equity industry.

The point is that the owners have multiple chances to make money. Initially they can cash out some equity with the first investment. Then over the next five years, their remaining equity will grow. When the second private equity firm comes along, they can do a second cash out of equity at a higher value. Normally, these investors will want the management team to continue the ride, so you can remain invested.

That means there will be more bites at the cash out cherry at ever increasing valuations (as long as the company is doing well). At some point the founders can exit completely or the company could be listed. In the latter case, the founders can hold a highly valuable and growing stake in a listed company.

When a company reaches the size that listing is viable, it usually gains a high profile and the valuation metrics jump up significantly. It is very lucrative.


Private equity offers an opportunity to grow your business beyond your wildest dreams and to earn generational wealth. Think about it next time a private equity fund gives you a call.

Even better - think about calling us when you are looking for investors.

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