Recently I had more than a handful of businesses in a conundrum deciding between PE investment or loans. There were two that were not even close to being ready to entertain investors. One wanted to launch a new revenue channel but admitted he did not want to have investors in his current practice rather this new division. Apparently, it did not dawn on him to change the name of the investee company. The other business shared he had profits but had a list of goals to showcase just so that private investors would put in money. I asked a simple question on whether all would be accomplished within a year. The response was yes. I asked how many employees does he currently have. He mentioned eight. Basically, the business would hit three new ethnic markets, provide an advertising platform in addition to vendor and client platforms. I let him know the vision is more than 10-fold of where the business is at currently. I repeated my question again on whether he can still accomplish this in one year. This time the client hesitated. He understood where my line of question is going.
The important lesson is that most sophisticated PE investors are adept at how businesses start, grow, and expand. If the responses from the business owner seem doubtful, then it does smell bad. Basically, we can smell BS when we hear it.
The advantages of a bank loan are that can be small and there is an ending period. The disadvantages are the application process, the personal guarantees, and the hoops you have to go through to obtain a bank loan.
The advantages of PE investment are that they understand risk and reward. Certainly, the reward will be in the appreciation of value when they exit; and there is always an exit. Always select a PE shop that can bring value: new clients, vendors, hires, etc.