Growth equity vs buyout: which type of investor fits your company?

What is the difference between growth equity and a buyout?

Growth equity buys a minority stake to fund expansion. A buyout buys a majority or all of the company and takes control. Growth equity usually adds little debt. Most buyouts use debt.

Commonfund, an investment manager, states the core difference: “Unlike buyouts, growth equity deals typically do not involve taking full control or adding a lot of debt.” A buyout is the opposite on both points.

This matters to you as an owner because the two investors want different things. A growth investor backs a company that already works and needs fuel. A buyout investor takes over ownership, often with a plan to build the business with you or around you. Learn the terms in our glossary: growth equity, leveraged buyout and private equity.

How do they compare side by side?

The two differ on stake, control, debt and how the money is used. This table uses Commonfund’s descriptions for the general pattern. Individual firms and deals vary, so use it as a guide.

Note the last row. Commonfund describes a typical buyout holding period as often about 5 to 7 years. Growth equity investors also plan to sell, so both come with a later exit. Ask any investor about timing early.

When does growth equity fit better than a buyout?

Growth equity fits better when your company is healthy, you want to keep control and you need capital for a specific plan. It works for owners who do not need a large cash payout today.

Growth equity tends to fit when:

• Your company has a proven model and you can name how new capital will be used.
• You want to keep running the company as you do now.
• You do not want to add much debt.
• You can accept a smaller cash payout in return for control.
• You want to bring in a partner but not hand over ownership.

Commonfund says growth equity investors usually take a minority stake, often 20% to 40%, rather than a majority or 100 percent. The investor often sits on the board and uses protective rights. You still run the company.

Weigh the trade. You keep control, but you take less cash off the table. If the business falters, your personal wealth stays tied to it.

When does a buyout fit better than growth equity?

A buyout fits better when you want significant cash, a hands-on partner and shared decisions. It also fits when the company needs bigger changes than a minority investor can drive.

A buyout tends to fit when:

• You want to take a large part of your wealth off the table.
• You want a partner to help build the team, systems and acquisitions.
• You are ready to share control and report to a board.
• You plan to step back over time.
• You want a buyer who can fund a bigger growth plan.

You give up control, and you often roll over part of your equity. First Citizens notes that many owners “retain a minority equity stake in the company, giving them a chance to participate in the equity upside when the PE firm eventually exits the business.” The rollover equity entry shows how that works.

Debt is the other cost. Commonfund says most buyouts are leveraged, and debt “adds risk: if the company’s cash flow falters, it may struggle to repay.” Ask any buyer how much debt it plans to add and how much cash flow the company needs to carry it.

Where does Capstreet fit?

Capstreet is a Houston private equity firm, founded in 1990. Its published criteria are “$3 to $15 million of EBITDA,” “Primarily majority investments,” and “Entrepreneurs reinvest alongside Capstreet.”

“Primarily majority investments” puts Capstreet on the buyout side of this comparison. The firm is not a pure minority growth investor. It also says it invests with the founder in mind: it typically invests “side-by-side with business owners” and structures transactions “so that the founder(s) retain an ownership stake.”

Capstreet describes itself as a firm that partners with “growth-focused management teams.” It says it focuses on “untapped growth potential.” So a Capstreet deal is a majority deal built around growth, not a growth-equity deal. Its stated method is the Capvalue Framework®: Research, Build Scalable Platform and Drive Business Transformation.

Capstreet’s record includes “50+ Platform Acquisitions” and “200+ Add-on Acquisitions.” Our buy-and-build strategy page explains how a platform company grows by adding others. If you want to keep majority control, a growth equity investor may fit you better, and we will say so.

What should you ask any investor before you sign?

Ask every investor, growth or buyout, the same short list of questions. The answers show how the deal will feel after closing. Put them in writing where you can.

Ask for references from owners who worked with the firm and, if you can, from owners who left. Then run the same questions past your lawyer and your tax adviser. Terms in the letter of intent are the easiest place to fix a problem, so read that document with care.

How should you decide?

Start with control and cash, since those two drive the choice. Then compare offers on the same terms. A growth equity offer and a buyout offer look different on paper, so line them up.

1. Set your control line. Decide which decisions you will not share.
2. Set your cash need. Decide how much liquidity you need now.
3. Name the use of funds. If you can list how new capital will grow the company, growth equity may fit.
4. Check debt. Ask how much debt each investor expects the company to carry.
5. Check the exit. Ask what each investor expects at its next sale and what rights it holds.
6. Compare people. Meet the team that would sit on your board. Our guide on how to choose a private equity partner lists questions.

If you are also weighing a smaller stake sale, see our comparison of majority vs minority recapitalization.

Next step

If you want a majority partner for a company with $3 to $15 million of EBITDA, review our deal criteria and our page on selling your business to private equity. Then contact Capstreet for a confidential conversation at 713-332-2700 or connect@capstreet.com.