Searching For Profit In Privately-held Companies

By Author: Jonatha Bell
Total Articles: 6
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Moreover, privately held companies are always on the lookout for fresh capital to fund their new projects, product innovations and development and expansions programs.

Small privately-held companies find it hard to raise cash providing opportunities for private investors to invest in such companies. Avenues for investment also open up when a major stakeholder is required to recapitalize the business or when an existing partner expresses a desire to leave, which creates a void that needs to be filled.

This is one of the major and most frequent problems faced by private companies – the inability to retain key partners. Executive talent is tempted and enticed into leaving through lucrative remuneration packages that are hard to resist.

So what really is a privately held business? It is a business whose shares cannot be publicly traded. Furthermore, more than half the shares must be closely held by not more than 5 partners. Normally these partners, apart from the founder and his immediate family members, include few investing partners.

There are various ways in which you can invest in a privately ...
... held business. You can chose to be an investor and your only interaction with the company will be limited to your financial involvement. Beyond that you will have no participation, active or passive, in the business. For such investors the investment is normally on the smaller side. However, for substantial investments, the company’s directors could make you part of the decision making body and ask you to participate in the company’s boards and meetings.

How much you invest can be decided after you assess the pros and cons and whether you want to be a supine partner or are interested in a majority ownership. Of course you must take into account the responsibilities that you may be asked to fulfill and also weigh the risks involved in the business.

There are many benefits and drawbacks of investments in privately held businesses. For example you can make a conditional investment and setting a fixed date for repayment or also insert a exit-at-will clause ensuring that whenever, you feel that things are not right, you can take your money and leave.

Small businesses are by the very nature small and easy to grow into. You can understand its workings and methods pretty easily. Furthermore, access to financial reports and bank statements help evaluate if your money is in safe hands.

On the negative side, however, you can have lesser influence on the decision making process as the other partners normally feel that they are ‘owners’ of the company and see you as an unwelcome intrusion, had it not been for your money. As a recent minority investor, you may have less influence than the original board or management team.

Before you invest research the company carefully. Check its track record and ask yourself why it needs your investment. Ensure that there are no legal proceedings pending against them. Initially keep your investment minimal to test the waters and always set the term and rate of return of your investment – if you do your homework well, the returns will surely follow.

Jonathan Feldman of Millennium Drilling, a recognized genius, known for his remarkable ability to identify business opportunities and generating value in niche markets, that saw him successfully accumulating and managing assets of much more than $650 million, advises that purchasing substantial equity of closely held private businesses is a prudent and far-sighted decision, that is certain to pay rich dividends.