|
[Editor's Note: With
higher interest rates, a lower stock market, and banks more reluctant to
lend, valuations for companies looking to exit have taken a hit. I thought
this would be a good time to talk about minority recaps. -dpm]
Many company CEOs and CFOs
today are spending a good deal of time “working” the banking
environment. Many of our client companies are performing at very good
levels. Some are interested in taking advantage of acquisition
opportunities, others in 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. Others are 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. We recommend
consideration of minority recaps.
What are 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 finance
acquisitions. 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 all
private equity firms want control. While
that may have been true ten years ago, in today's environment, some 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 for every business owner
The company needs to have
the following characteristics:
• Good
operating performance (cash flow and revenue growth)
• Good
management team
• Strategic
Growth Plan (tangible opportunities for growth)
For those companies that
meet these parameters, it might be just the ticket.
Beware – Not all minority
recaps are favorable.
Some PE firms will add terms that make a minority recap very onerous and
function more like a control investment. It is important to have
professionals on your team that understand these transactions and who know
which PE firms are comfortable with minority positions.
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:
A few 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
chips 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. After five years, the company recorded over
$130M in revenue. That second bite 65% share was worth a lot more than it
had been five years earlier. 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."
Market Challenges
The current market offers
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 capital to acquire and grow during a
period when everyone else is 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 at
(303) 660-8135 or meaddp@meadconsultinggroup.com
Note SBA Update: For small transactions, As of August 1, 2023 there are numerous changes to the SBA Loan programs. Among them: The SBA now permits "partial change of ownership" which provides greater flexibility for small businesses.
|
