Debt in the structure of an acquisition can significantly increase the returns on invested equity (e.g. 48% in the example below). This helps investors and owners alike.

​

​

​

​

​

​

​

​

​

 

 

 

 

 

 

 

 

 

In a private equity transaction, banks know that private equity firms won’t earn a return on their investment – or get debt financing on their next acquisition – if they don’t pay the bank back. So banks are willing to provide more debt capital in a private equity supported business than in one owned by an individual.

​

Typically, private equity firms in the lower middle market manage this debt, and the businesses they acquire, quite prudently. In fact, businesses backed by private capital have outperformed other businesses by a large margin. Results from a study completed by the Association for Corporate Growth confirm superior performance by private-capital backed businesses in job creation and sales growth from 1995 to 2010.

​

​

​

​

 

 

 

 

 

 

 

 

 

 

 

 

 

So what does this mean for your business?  If you finance your own business, you can use commercial debt to improve the cash flows and income of your business – although you may require a greater cushion than private equity owners as a defense against negative surprises.

​

On the other hand, if you are selling your business to a private equity buyer, you can expect to have more debt of a variety of types on your balance sheet. And be glad for it. The remaining stock you hold in your business will likely be worth a lot more in the future because of it.