It's a common dilemma entrepreneurs face: They are in the market for more funding, but they want the money with no strings -- or at least, fewer strings. As it turns out, this goal isn't as far-fetched as it seems.
Consider the story of the Pans. By 1997, J. J. and Teresa Pan had been in business for 14 years, building E-TEK Dynamics, Inc. into one of the nation's leading optical component manufacturers. While this couple was seen as a resounding success story, their family-owned business demanded a tremendous amount of their time and resources. All their personal wealth was tied up in the business, and Teresa wanted to spend more time with their then school-aged daughter.
The Pans considered taking on a private equity investor, creating liquidity for the founders and providing capital that would enable the firm to continue to grow. However, they were reluctant to give up control of the firm they had built from scratch.
The Pans were also leery of debt financing, believing it would undermine the financial soundness of their business. But as they explored the possibility of an equity infusion, they worried about the impact of bringing outsiders into a company run by family and longstanding acquaintances. Many of their employees were, like them, Chinese immigrants, accustomed to the old world culture that the Pans had fostered at E-TEK Dynamics. How could they continue to provide for these valued employees while also meeting their own needs for liquidity?
In the end, a private equity investor turned out to be the answer -- because the Pans worked out a deal that suited their needs, a turn of events they hadn't expected. An investment was structured that provided $120 million in equity for liquidity and growth. The private equity investor joined E-TEK Dynamics' board, consulting on major strategic issues but leaving operational decisions to the Pans and their management team. The firm's culture, valuing long-term employees and family connections, remained in place. Equally important, the company also made important strides towards increasing its market value.
The deal led the way for E-TEK to build out new technology, hire a top-notch CEO, and move into new markets. Over the next three years, E-TEK Dynamics grew from $70 million in revenues to $1 billion and from 300 to 5,000 employees. In June 2000, the company merged with JDS Uniphase in an $18.4 billion transaction, which represented the second-largest technology merger in history at the time. The Pans retired with tremendous personal wealth, earning a spot on the Forbes 400 for several years afterwards.
Like E-TEK Dynamics' founders, many entrepreneurs hesitate to take on an outside investor because they are concerned about giving up control of their company. With care, entrepreneurs can make sure that a private equity investment meets their capital requirements as well as their desire to maintain control. Here are some issues to think about when you're considering an offer from an outside investor:
Majority or minority control: Do the investors insist on buying the majority of the company, or will they consider a minority stake? Look for a partner who is willing to act as an investor while leaving the entrepreneurs with significant ownership stakes.
Respect for your expertise: Does the investor understand and value the skill-set that you and your team have brought to building the business? Smart private equity investors buy good companies run by seasoned managers and let them do what they do best. Great companies are built by great management teams – not by investors.
Flexibility about key issues: Talk to your investor about the issues that are important to you -- such as culture, commitment to long-term employees, relationships with suppliers and partners and community relations -- and make sure they are on board with your priorities.
Track record and referrals: Ask potential investors if you can talk to other entrepreneurs they've worked with. Find out how much control these business owners have retained after the transaction.
Value beyond the initial investment: Although seasoned private equity investors will typically leave day-to-day operational decisions to the entrepreneurs, they can add significant value through strategic advice, financing expertise and extending your network of potential partners and management candidates. Look for partners with records of helping portfolio companies maximize their value and reach their long-term objectives.
Gaining access to capital doesn't always mean giving up control. Structured properly and with full consideration of your unique requirements, a private equity investment can help you reach your personal and business goals without compromising your ability to run your company.