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er &

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.Financial Advisory

Investment Banking

Private Equity

Fall 2006

Matching sources of capital to your needs and strategy

At the 2005 Family Firm Institute confer-ence in Chicago, keynote speakerChristie Hefner described a conversation

she had with Michael Milken in 1988, shortly after shebecame president of the then-troubled PlayboyEnterprises. At a meeting he requested, Milken, thenWall Street’s junk-bond king, told her he could easilyraise half a billion dollars for Playboy Enterprises.

Hefner—daughter of Playboy founder HughHefner—told Milken she didn’t know how she coulddeploy that kind of capital in ventures that would earnenough return to service all the debt. She recalled tothe FFI audience that Milken responded, “First youraise the money, then you figure out what to do withit.” That didn’t sound right to her, so she declined hisoffer.

Hefner may have been inexperienced in thoseearly days of her leadership role, but she made a wisedecision. Strategy should dictate how much capital isright for a company. And the type of capital you raiseis equally important. A mismatch can severely handi-cap your business strategy.

Just as tempting as Milken’s offer might haveseemed to Hefner, today’s flush capital markets mayinspire family-owned and other private companies tostuff their coffers with as much cash as they can raise.

Private equity funds raised record amounts offunds in 2005. Just consider that as of late last year,according to Thomson Financial, global private equityfunds had unused capital in excess of $482 billion, up59% from 2002. The global debt market increased atthe same rate, resulting in $5.7 trillion of availablefunds in 2005. When banks and private-equity fundsfind a good investment, they want to put as muchmoney to work as possible. If that sounds too good tobe true, it is.

A fourth-generation chain of drugstores in theMidwest learned this the hard way. It tapped the pri-vate equity market to buy out some shareholders andprovide liquidity for family members, as well as to

finance business growth. Two years into the invest-ment, the family owners’ private equity partners, whoowned 40% of the company’s stock, spotted anopportunity to sell their shares to a strategic buyer.The family didn’t want them to sell, but covenants inthe private equity documents clearly allowed them tocash out.

Other companies have used a bank to finance anew growth opportunity, only to discover their loanrestricts them from taking advantage of that opportu-nity. Funding an acquisition with bank debt may seemattractive because it’s cheaper than private equity.But covenants in a bank loan, such as maintainingdebt-equity ratios and profitability levels, may leavethe company no flexibility to raise additional capitaldown the road.

With financiers so flush with cash, it might betempting to sign on the dotted line. But it’s wise to firstlook at your strategic opportunities and shareholders’liquidity needs, evaluate all available sources of cap-ital and then determine the right source. The questionis not whether capital is available, but whether theright type is available for you.

First, take these stepsBefore searching for outside capital, conduct the fol-lowing assessments:

• Draft a strategic plan. Instead of letting an out-sider define your growth strategy, develop your ownfive-year strategic plan. Identify growth opportunities,determine the cash required and calculate what cashreturns they would generate. The strategic planshould drive growth opportunities.

• Identify shareholders’ liquidity needs. Toavoid surprises, be aware of your shareholders’ futureliquidity needs before an outside source of capitalenters the picture. The needs may be as simple asdividends or liquidity flexibility, or as complex asestate settlements and shareholder buyouts.Discussions with shareholders and their advisers can

(Continued on page 2)

Before�you�tap�the�capital�markets,�determine�how�muchyou�really�need,�and�what�type�of�financing�is�right�for�you.

help you assess the timing of such liquidity needs. To theextent they can be quantified, they should be factored intoyour strategic plan.

• Revise or reinforce family governance structures.Before letting an outside source of capital share in yourcorporate governance, make sure your governance systemsatisfies your relatives’ control and information require-ments. Your governance structures should be strongenough to allow a healthy partnership with the outside cap-ital source.

Four types of needYour strategic and liquidity plans will reveal your need forone of four types of capital. Mismatching sources andneeds will result in cash flow shortfalls and strained rela-tionships.

• Working capital needs emerge from seasonality orcash flow cycles. For instance, cash flow needs arise untila company can collect receivables. Typically, working cap-ital needs should be financed by bank lines of a year orless in maturity. The cost of the bank line and thecovenants attached to it should match working capitalneeds.

• Bridge capital can finance either a specific project orthe acquisition of long-term assets, such as building a newplant or purchasing a new machine. It’s important to matchthe duration of the financing with the useful life of the assetor project. Bank financing or institutional debt is usually themost appropriate source for bridge capital. The term tendsto be fixed-rate, amortized over the life of the project orasset involved. The servicing and repayment of the debtshould be matched to the cash flow generated by the proj-ect or asset. Debt repayment must be structured to begin

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only after the venture is likely to generate cash.• Transitional capital needs arise when companies

face ownership or strategic transitions. Ownership transi-tions may involve the buyout of some shareholders. Astrategic transition might involve taking the business to thenext level of growth, such as developing a new market ornew product, or even a long-term acquisition. Such transi-tions result in shareholder value growth, so the mostappropriate sources of capital are private equity funds orsubordinated debt lenders. Their investment typicallyinvolves equity participation and a relatively short-termexit—typically five years. The key issue is the company’sability to generate sufficient value from such transitions toprovide for the exit of the capital sources and a healthyreturn to the family.

• Strategic capital supports long-term development ofa business, such as expansion into a new geographic areathat requires taking on a local partner, or a buyout of awhole branch of the family. These initiatives can befinanced via strategic, joint-venture partners with deepexperience in the industry or expertise in areas such asinternational distribution. Family business investors whoare willing to partner with your family might be anothersource of capital to consider. Seek out a partner who canbring strategic or ownership value in addition to capital.Before you accept any offers, define your growth opportu-nities as well as your shareholders’ dreams and expecta-tions. Analyzing your needs and matching them with thesources of capital at hand will pave the way to a healthyrelationship with outside capital providers.

by François de Visscher

Matching sources of capital to your needs and strategy (Continued from page 1)

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As part of de Visscher & Co.’s culture of collabo-ration with other advisors to closely held busi-nesses we are pleased to profile John Franco,

a friend and colleague with whom we have had a long andmutually beneficial working relationship. John has beenone of the leading group facilitators of Vistage International(formerly TEC) a worldwide organization of CEO peergroups in Connecticut since 1995. As a group facilitatorJohn has counseled numerous companies across a broadrange of industries on issues of value creation, leadership,succession, personnel development management effec-tiveness, and financing/liquidity. He is truly a “trusted advi-sor” to his members, some of whom de Visscher & Co. hasserved. John is also a Board member of Blessing White,one of Family Capital Growth Partners’ portfolio compa-nies.

Prior to joining TEC, John was President of GeneralLearning Corporation, Xerox Learning Systems andLearning International respectively. Learning International,a Times Mirror Company, is a worldwide leader in sales,service and management training. Under John’s leadershipthe company expanded their business to 28 countries inEurope, North and South America, and the Pacific Rim.From 2001 to 2004 John was President of TEC WorldPartners where he was responsible for the growth of TEC’s

Global Partnerships.Since 2004 John hasbeen the Vice Presidentof Field Operations andBest Practice Chair forTEC/Vistage in theNortheastern UnitedStates.

John has main-tained a long standingcommitment to on-goingresearch on critical busi-ness issues. He hasauthored articles on avariety of topics rangingfrom hiring to sustainingcompetitive advantageand he has conducted workshops on sustaining competi-tive advantage with senior executives throughout theworld.

We at de Visscher & Co are most appreciative of trust-ed family business advisors like John Franco who addvalue to their clients and constituents and provide us withan opportunity to collaborate with them when there is anappropriate need and fit. Contact John directly at 203-698-3081 or john.franco@vistage.com regarding TEC/Vistageor his services as a prospective Advisory Board or corpo-rate Board member.

Advisor of the Quarter

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Oneida Molded Plastics, LLC, with locations in Oneida andPhoenix, NY and in Siler City, NC, provides comprehensiveinjection molded plastic products and solutions for cus-tomers with demanding applications requiring high-qualitysecondary value-added services and tooling services. Animportant part of its suite of capabilities is the Company’sexpertise in providing superior finishes suitable for coating,painting, plating, and other aesthetic applications.

This announcement appears as a matter of record only.

March 2006

Additional investors include management,Laud Collier & Co., and Argosy Investment Partners.

Family Capital Growth Partners L.P.

Family Capital Growth Partners L.P. is pleasedto announce its capital investment of

$2,066,667in

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de Visscher & Co.is an independent financial advisor to business owning families and closely held businesses worldwide.

Through a unique combination of financial advisory, capital raising and investment banking services the team atde Visscher & Co. creates high value-added solutions to the liquidity needs of shareholders and the capital needs of

their businesses. Family Capital Growth Partners (www.fcgplp.com), a private equity fund affiliated with de Visscher &Co., also provides equity and subordinated debt capital to growth-oriented closely held and family-owned businesses.

Two Greenwich Office ParkGreenwich, CT 06831

Tel: 203-629-6500 Fax: 203-629-6547Website: www.devisscher.com e-mail: worldhq@devisscher.com

We would like to welcome Jean Argentiwho has joined us in September as

Administrative Assistant.

Employee News

We will be speaking or participating at the following conferences:

Business�Growth�Alliance�–�Middle�Market�BusinessOwner/Executive WorkshopSeptember 20, 2006 - ToledoFor more information please visit www.businessgrowthalliance.net

Business�Growth�Alliance�-�Middle�Market�BusinessOwner/Executive WorkshopOctober 3, 2006 – ColumbusFor more information please visit www.businessgrowthalliance.net

The�Families�In�Business�ConferenceOctober 12-13, 2006 – New York CityFor more information please visit www.campdenconferences.com

Family�Firm�Institute�October 25-28, 2006 – San Francisco, CAFor more information please visit www.ffi.org

European�Family�Office�ConferenceNovember 14 & 15, 2006 – LondonFor more information please visit www.campdenconferences.com

This announcement appears as a matter of record only.

June 2006

Merion Investment Partners, L.P.co-invested on the transaction.

Family Capital Growth Partners L.P.

Family Capital Growth Partners L.P. ispleased to announce its capital

investment of

$2,000,000in

a Chimney ProductsManufacturing Company

Save the Date…

We Have Moved!de Visscher & Co., LLC

and

Family Capital Growth Partners L.P.Two Greenwich Office Park

Greenwich, Connecticut 06831

www.devisscher.com

All phone and fax numbers remain the same.

The Company designs, manufactures and distributeschimney liners, insulation and other related chimneyproducts. They manufacture premium stainless steelchimney lining systems that are sold directly to theventing professionals.

Family Capital Growth Partners L.P. (www.fcgplp.com)is a uniquely focused private equity firm providing bothgrowth capital and shareholder liquidity capital to fam-ily owned and closely held businesses. FCGP’s flexi-ble charter allows it to make equity or subordinateddebt investments for majority or minority positions andform long-term partnerships with growth-oriented fami-lies and management teams.