Private Equity Groups

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Private Equity FAQ 

 

 

 

 

 

 

 

 

 

 

 

 

Transact Partners is Your Private Equity Specialist

The current state of the merger and acquisitions market remains strong, especially in the lower middle market (businesses with revenues from $3 million to $100 million). On the strength of this market, the value of well run privately held companies is at an all time high. As a result, many business owners are considering selling their company to gain liquidity for the asset that usually represents the majority of their net worth.

Perhaps the most important decision for a business owner is when to relinquish or transfer ownership of the company. This decision requires business owners to make an honest assessment of the entire situation from a corporate, shareholder, employee and family perspective. As a result, the typical list of question we get are: "What is the market value of my business?" "When is the right time to sell?" "Am I really ready to retire?"

Our experience finds that many business owners want to slow down, but are not quite ready to take the step toward retirement. That being said, many owners desire a liquidity event to achieve personal objectives or to diversify their overall investment portfolio. If the equity in the business represents a majority of the owner's net worth, the idea of monetizing a portion of their "investment portfolio" while remaining active in the business is often an appealing option. This scenario is best achieved through a Private Equity Placement or Equity Recapitalization with a Private Equity Group.

There are many options and benefits to a private equity placement or equity recap transaction. First and foremost, a business owner typically retains some equity interest in the company. In addition to obtaining substantial liquidity to diversify personal assets, a business owner will continue to operate the business with considerable autonomy and gain access to capital needed to support future growth. Furthermore, the operator is compensated for operating the business. The investor group typically exits its investment in three to six years through a sale of the company. The proceeds from the recap and subsequent sale can often exceed the value obtained through an outright sale of the company. The ultimate objective is to make your ongoing equity ownership worth far more than it is today.

Some benefits of a Private Equity Transaction are:

• Diversify your holdings by liquidating part of the company
• You have control over the deal structure
• You retain an equity interest in the company
• You receive compensation for operating the business
• Eliminate personal guarantees
• Access to capital for growth
• You and/or your management team runs the day-to-day operations
• Assist with estate planning considerations
• Access to new industry contacts and resources

Private Equity Groups will structure a transaction that meets the needs of everyone involved in the deal including management and shareholders. Typically, a transaction offered by one of these organizations will fit into the following categories:

• Full or Leveraged Buyout – The group will acquire most if not all of the equity of the business. The owner may have the option for “trail” equity and receives compensation for running the business.
• Management Buyout – The group will invest in and with a strong management team to acquire an operating division/subsidiary of a larger company or with the purchase of a private company. This is relevant in situations where the owner wishes to exit the business and not retain an equity position.
• Recapitalizations – The group provides the equity capital and arranges the debt financing to provide the current shareholders of a business with partial liquidity. The ownership will continue to operate the business on a daily basis.
• Growth Investments – The groups will make minority investments in rapidly growing companies to provide working capital for internal growth and/or strategic acquisitions.

   

A positive relationship between the business owner and private equity investor is vital for a successful equity recap transaction, with both parties focused on the company's success and continued growth. The business owner and management team must be willing to accept the investor as a partner in the business, working toward a common goal of increasing the overall value of the company.

Another question that we get is “Is my company a candidate for one of these investments?” It is important to remember that private equity groups only invest if there is a solid earnings history and continued growth potential. The foundation of their business model is centered on the belief that medium-sized growth companies will produce superior investment returns. If your business has a re-casted EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization) of $1 million or more, you may qualify.

Please contact David Boykin at Transact Partners today for more information.