Once a business has been acquired by a private equity company, it is in for some notable changes. It is the motive of a private equity company to find a business that is struggling financially or just having a tough time growing, buy it and do whatever is necessary to turn the company around and sell it later for a profit. Once acquired, a target company's management, balance sheet and business operations all become fair game in which the new private equity owners can mettle.
Overview
Private equity companies do not always acquire entire businesses. Sometimes they buy assets in a piecemeal fashion. When they do buy companies outright it's known as a buyout. Using a combination of their own resources and debt, the latter of which is generally piled onto the target company's balance sheet, private equity companies acquire struggling companies and add them to their portfolio of holdings. What they do with those businesses over the following several years determines how profitable an exit strategy will be for the business, the owners and the investors.
Layoffs
It's not uncommon for the buyout process to result in job cuts at target companies, which is one of the signature moves of private equity companies. Layoffs are part of the cost-cutting measures that buyout companies use to make an investment more profitable for them when it comes time to exit the holding. Following such layoffs, private equity executives sometimes hire new talent of their own choosing, according to a 2008 "New Yorker" study.
Exit Strategy
It's not the intention of a private equity company to own a business forever. After five to seven years, it must cash in and show investors profits. There are three primary ways that a buyout company can do this:
-- It may decide to conduct an initial public offering, in which the holding company becomes a publicly traded stock.
-- In what is known as a strategic sale, the buyout company can sell the business to a competing company in the sector.
-- The buyout company might even shed the business to yet another private equity company in what's dubbed a secondary buyout, according to a 2012 "Wall Street Journal" article.
Debt Management
Following a private equity buyout deal, target companies are likely to have taken on more debt than they had before the acquisition. Indeed, private equity companies finance buyouts using equity of only 30 percent to 40 percent, relying on debt taken on by the target company to finance the rest, according to a 2012 "Wall Street Journal" article. Once a buyout company exits private equity ownership, it has to manage its debt or it will be in danger of defaulting on its obligations.
References
Writer Bio
Geri Terzo is a business writer with more than 15 years of experience on Wall Street. Throughout her career, she has contributed to the two major cable business networks in segment production and chief-booking capacities and has reported for several major trade publications including "IDD Magazine," "Infrastructure Investor" and MandateWire of the "Financial Times." She works as a journalist who has contributed to The Motley Fool and InvestorPlace. Terzo is a graduate of Campbell University, where she earned a Bachelor of Arts in mass communication.