In ABC-TV’s show “Shark Tank,” would-be entrepreneurs pitch their brightest ideas to leading business executives to secure large investments for their companies in exchange for some equity stake in the company. Behind the glitz and glamour, “Shark Tank” gives viewers a glimpse into the real world of private equity investment. Every day, private equity firms invest in or entirely buy companies on the promise that their capital infusion will make businesses soar to new heights.
However, in many cases, the promise of private equity investment can sometimes amount to fool’s gold — all shine, no value. Every industry has bad apples; while many private equity investors act in good faith and often help businesses thrive, bad actors put many businesses and the jobs they support on the line. Business owners must be very discerning about which firms they sell equity to in times of economic uncertainty.
Private equity as we know it today, which comprises 6.5 percent of the U.S. GDP, has been a significant component of the economy for half a century. Initially, private equity was primarily a capital transaction: investors stepped in to help a business get its finances in order, cut waste and turn a profit. Today, private equity investors are more hands-on, serving as day-to-day partners or owners who help shape the direction and vision of the companies they invest in.
In many cases, private equity can be a godsend for business owners looking to take their companies to the next level. To use an example from “Shark Tank,” in 2012, the owners of Scrub Daddy, a nifty kitchen sponge company, received a $200,000 investment. Today, Scrub Daddy is a massive success with more than $670 million in sales over the last decade.
There are many examples of how private equity investment can transform a company for the better. But before every business owner jumps to sell equity, they should do their homework to ensure that the investors are who they purport to be because a bad private equity partner can spell doom for even the best companies.
When beloved toy store Toys “R” Us hit hard economic times, it was sold to several private equity firms, which promptly shouldered the toy chain with hundreds of millions in debt and forced the company into bankruptcy, much to the chagrin of America’s kids. Prima Wawona, America’s largest producer of peaches, was purchased by Paine Schwartz, which drove the company into bankruptcy and cost jobs up and down the supply chain. And after Sun Capital Partners bought Friendly’s, a fast-food company, it also drove the company into bankruptcy in just a few years and moved to eliminate pensions that 6,000 employees had worked hard to earn. State pension funds pour billions of dollars into private equity, so when private equity investments go belly up, taxpayers often foot the bill.
Right now, business owners need to be mindful of the investments they receive. Our economy has recovered well from the pandemic, but leading economic indicators warn that low consumer confidence and inflation could still drive us into a recession that would claim many businesses. Business owners need to make sure that the partners they seek will be good partners who will guide them through whatever the future holds and not predators that profit from the demise of their business.
Growing a business is tough work, and private equity partners have a decisive role to play in helping companies compete and succeed. But some investors have only fool’s gold to offer, which is why business owners must take a close look at their records before selling. Many private equity investors turn out to be “Mr. Wonderful,” but some are nothing but hungry sharks.