private equity may be your best exit strategy
DESCRIPTION
Private Equity Groups are very disciplined buyers of privately held businesses. In many cases they will not provide the most money at closing compared to a strategic buyer. However, for many businesses, when you take into account, the second bite of the apple (the sale of the original owner's retained equity), the terminal transaction can be far superior to the strategic buyer's value. This concept explores situations where private equity may be the owner's best buyerTRANSCRIPT
- MidMarket Capital Private Equity May Be Your Best Business Exit Strategy
PRIVATE EQUITY WORKS VERY WELL WHENGrowth Capital Needed Partners retirement schedule differs Small Differential in Strategic Buyer Offer and Private Equity Offer 85% of Family Net Worth in the BusinessNearing Retirement Take Chips off the Table PRIVATE EQUITY MAY NOT BE THE BEST CHOICE WHEN Your industry multiples are high You are looking for strategic multiples not supported by cash flow or EBITDA Your business potential is not yet reflected in your financial performance You want to exit ASAP The market is willing to pay you for synergies, future growth potential or intellectual capital PRIVATE EQUITY GROUPS PREFER COMPANIES THAT HAVE Strong management willing to stay Niche market leading share Rapidly growing market Established Brands Strong and diverse customer base Sales/Distribution expertise Expansion potential with additional capital A minimum EBITDA level (private equity firm specific) Management teams interested in retaining an ownership stake HYPOTHETICAL TRANSACTION THE BACKGROUND The business owner is 60 years old $25 million in revenue and producing an EBITDA of $3 million. major capital expenditure required he should be diversifying his assets He loves his business and is not ready to retire. PRIVATE EQUITY DEAL STRUCTURE Sale price Total debt used to fund the transaction (65%) Total equity investment required Private equity firm portion (70%) Owner reinvestment portion (30%)$15 million $9.75million $5.25 million$3.675 million $1.575 million CREATING VALUE FOR THE OWNER Company selling price Owner equity reinvestment Owner pre tax cash proceeds Owner value creation Value of 30% interest in $18 million company Add cash proceeds from the sale Total post sale value$15 million $1.575 million $13.425 million$5.4 million $13.425 million $18.825 million THE FINANCIAL HERO PHASE 1 Secured his familys financial future Took majority of your chips off the table under favorable circumstances Create a pool of liquid assets to allow your financial professionals to implement a diversification strategy You are still the boss You have a deep pockets financial partner focused on growth and profitability Receive a generous employment contract and bonus Solidify your exit timeframe THE PRIVATE EQUITY PARTNERSHIP Make 3 Add-on Acquisitions totaling $8 millionMatch the Equity Participation at 30%PEG leverages 65% debtTotal Equity Required $2.8 millionThe owner is invited to invest back into each acquisition at the same leverage rate so $840K additional equity required Seller retains 30% equity in the Company THE SECOND SALE A SECOND BITE OF THE APPLE After 5 years the Private Equity Partner decides it is time to exit Options are IPO, sell to a strategic industry player or sell to another private equity group Now Company Revenues are at $75 million They get interest from several industry players and decide to sell out to the best one in a soft auction process$65 million The valuation multiples have improved over the original acquisition multiples because of the size, improved profit margins and product and customer diversification THE MATHEMAGIC OF A SUCCESSFUL PRIVATE EQUITY TRANSACTION Owner pre tax cash proceeds original transaction Owner pre tax cash proceeds second transaction Less invested equity in add-on acquisitions$13.425 million$19.5 million $.84 millionTotal pre tax cash proceeds from both exits $32.085 million CONCLUSION Exit on owners terms when business is healthy and performing well Reduced financial risks substantially by providing liquid assets for a diversification strategy Reduced risks with a deep pockets partner with operating improvements Secured growth capital without risking any personal assets Eased into retirement over 5 years with pay and bonus Sold before the baby boomer rush put downward pressure on business selling prices Sold prior to the increase in LT Gains Tax CONTACT INFORMATION Dave Kauppi Managing Director MIDMARKET CAPITAL, INC. ph (630)325-0123 fax (630)230-3052 cell (630)215-3994 [email protected]