The involvement of equity fund buyers has reached an all-time high in recent years. Twenty years ago, equity fund buyers were generally not very large, and were often not very competitive buyers. Today that has changed. Today, they pay competitive market prices, often comparable to the big strategic players in an industry.
Also, equity funds offer a different set of alternatives to sellers – particularly for those who think they would like to continue running their companies for a time. The normal equity fund buyer really doesn’t have any desire to RUN the business directly. They like Board participation, and they thrive on in-depth strategy discussions and participation. But if the owner/seller does NOT want to stay involved, they often have a problem. In all likelihood they will need to identify the successor CEO before they put forth an aggressive bid to buy.
The CEO/owner operator job can be fairly risk-intensive, and even a tad lonely. Owners may find that a cash-rich, business-smart buyer to partner with can be a tremendous relief. Sellers come off of any debt personal guarantees. When they need to add human capital or new fixed assets to the enterprise, the money is there. When they hit areas where their experience or expertise is lacking, equity fund partners will spend great time and resources to find the needed talent or expertise. CEOs often thrive on well-connected business referrals and connections from their new equity partners.
There are a number of key protections for owners to build into any agreement with an equity buyer. Such funds most commonly LIKE for the owner to re-invest beside them, to continue with anywhere from perhaps a 10% ownership up to as much as 30 or 40%. Also, the percentage ownership to be maintained is not the same as the % cash to be re-invested. On a typical deal, the equity fund might finance half of the acquisition with equity, and half with debt. In that case, using as an example a $30M selling price – the equity fund would put in $15M in equity cash, and get perhaps $15M in debt. For the seller to “stay in” for this example, at 10%, he would need to put in 10% of the equity amount, and would re-invest $1.5M (10% x $15M). Thus, he would clear $28.5M free for personal use (the $30M price, less $1.5M re-invested).
The owner-seller would most commonly not get to cash in on that residual 10% until the equity fund re-sells again – usually at the 5 to 7 year mark later. At that date the owner would get his percentage of the new selling price (total proceeds, less interest bearing debt, x ownership % share). However, many equity funds can be receptive to a provision which would allow the minority holding owner to sell earlier, if he wishes to retire. Usually in those cases they would agree to buy him out at a fixed and pre-defined multiple of then current earnings, and usually they would be allowed to make such payment over a few years’ time.
Other protections for the seller may also be appropriate, like definition of expected duties and pay, outlines of primary benefits (cars, insurance, etc.), protections against requirements for relocation, and things of that sort. But those things are usually not hard to work through, and offer a bit more certainty for the future role.
As you choose a potential equity fund buyer, it pays to interview other sellers who have had the experience, with the fund you’re considering. How were these guys to work with? How often did they visit? What financial oversight was required? Were they easy to work with to get new capital put in when needed? Did they help with new development areas, or with new executive hires when needed? Other owners in their camp have gone through much of what you will if you close with them. They are worthwhile and significant resources for making the assessment.
Can it work well and mean extra profit for the seller? Absolutely. We have had clients who retained 20%, and who participated in a sale less than 5 years later, with their share for that “second bite of the apple” at MORE than their original selling price for the first 100% sale! It is different. You aren’t calling all of the shots, or running your own show with that second go. But, you also have significant resources behind you, and a full troop of knowledgeable people that you can call on.
If you think you will enjoy continued work with the company you have built, it’s definitely worth considering an equity fund buyer. The business markets are changing, and there are many alternatives for nourishing forward plans for owners who still enjoy their work, but would like to reduce their risk and secure their financial futures.
