(from Issues for Growth Vol. 18, No. 13)
Many company CEOs and CFOs today spend a good deal of time working the banking environment. Most are frustrated by the current tight credit situation. Many of our client companies are still performing at very good levels. Some are interested in taking advantage of acquisition opportunities, other growth plans with new products and new markets. Some are looking for the opportunity to hedge the risk and perhaps take a few chips off the table. Other have good performing companies, but have issues with their balance sheet.
I have been surprised at how few business owners, CEOs and CFOs are aware of MINORITY RECAPS as a potential means for growth capital, taking a few chips off the table, and possibly providing for balance sheet stabilization. In light of the current credit markets, a more challenging market for company sales, etc. we recommend consideration of minority reaps.
Minority recapitalizations (Minority Recaps) - Owners of mid-market and family-owned companies can sell less than 50 percent of their shares at minimal, or no, minority discount and still retain control.
Owners of mid-market and family-owned companies can sell less than 50 percent of their shares at minimal, or no, minority discount and still retain control; they can receive cash for their shares; they can use debt, as well as equity, to enhance returns; they can keep a significant equity tranche for a second exit – when market conditions might again be peaking; and they can pursue an aggressive and ongoing business plan designed to stimulate organic growth and financing acquisitions. In a challenging economic environment, this allows private company owners to lower risk by lowering the personal financial concentration they have in their business through diversification.
A common myth is that there is no capital available. The truth is that private equity firms have a tremendous amount of capital sitting on the sidelines waiting for the right opportunities.
Another common myth is that all private equity firms want control. While that may have been true ten years ago, in today’s environment, many PE firms are enthusiastic about teaming up with management to grow good companies with less than a controlling interest.
Minority recaps are not an appropriate alternative for everyone.
The company needs to have the following characteristics:
· Good operating performance (cash flow and revenue growth
· Strong management team
· Strategic Growth Plan (tangible opportunities for growth)
For those companies that meet these parameters, it might be just the ticket.
Second bite of the apple can be better and sweeter than the first.
For those companies that sell a minority stake with opportunities to grow, the results can be compelling. In many cases, partnering with the right private equity firm can provide growth that is many times higher than the company could have achieved without outside capital. When the company is ready to sell in an additional five years, perhaps, the owner can reap significantly higher returns.
Example: Five years ago a client of ours was doing $26 M in revenue with good margins and cash flow. The owner wanted to expand beyond the region into other markets with new products, but lacked the capital and financial expertise. We helped the company develop a strategic growth and execution plan and shored up some weaknesses to present the company in its best light. We assisted the company in finding experienced, knowledgeable resources to help. The company sold 35% interest to a private equity firm. The owner was able to take a few million of his ships off the table (his family was very happy that his exposure was lowered) and still had significant capital to expand. The private equity firm assisted with introductions, and recommended the addition of a terrific CFO and a strong VP of Operations. The company last year recorded over $130M in revenue. That second bite 65% share was worth a lot more than it was five years ago. The owner had this to say: “I had heard terrible things about private equity. But these guys really became our partners and helped us become a better company. Thanks to Mead Consulting for helping us get it done with the right team.”
The current market offers some interesting challenges. But some companies will be able to navigate these waters and put themselves in a lasting competitive position. Think about how your company could gain with the capital to acquire and grow during a period when everyone else is still in the bunker with their heads down. One caution – before embarking on this path, seek help from those professionals with experience working with mid-size companies in your position. If you would like more information on minority recaps please contact me.