Venture Capital for Small Business Buyout
One target for venture capital funds, traditionally, has been small to medium sized businesses. Venture capital for the small business buyout has a different goal than normal deals, however.
When you hear of venture capital being used for the small business buyout, you have to understand that it is often a different concept than the normal venture capital deal. In a regular venture capital deal, the idea is usually to take a start up or already established business to profitability and also to an IPO position. This is not the idea of the small business buyout. Normally, a business that is classified as a small business would not attract the interest of the venture capitalist.
Venture capital deals generally involve much more capital investment than is needed by the small business. So, what is the interest here? The answer lies in the old adage that “the whole is worth more than the sum of its parts.” The goal of a small business buyout is often consolidation. It is really about empire building. The venture capital concept of value added networking is what makes the small business buyout profitable.
The idea of networking is very important here. One of the major problems of a small business is the isolation of competition. When a group of small businesses are pulled together into a network under an umbrella company, former competitors often become major helpers. Some examples of this concept are the travel and entertainment business. By networking, these companies are now sharing resources with each other and not competing.
In other cases, the equipment, land, and human resources of the small business can be “folded into” the new entity that is created by the mergers and buyouts. The original business owners are free from the constant struggle of sustaining their small business. They are often given a choice between walking away with a handsome amount of cash, or staying in a management position in the company they started. Sometimes, they are able to do both.
Venture capital is usually not used to “rescue” the small business. This is not its purpose. The small business will usually not be capable of producing the type of ROI that fuels venture capital. The buyout approach followed by a conversion of the small business into part of something much larger can create the type of venture that offers the chance for a sufficient rate of return. The current state of the global market is leading business into an era when consolidation and networking is not only wise profit and opportunity wise, but might even be absolutely essential to long term survival.