Ambitious Entrepreneurs - Exploding The Myths of Private Equity Financing
Plenty of myths surround private equity investors. For example, some business owners fear that, if they partner with a private equity group, it might make off with the value of their company by buying low and cutting them out of the rewards when it later sells the company at a premium.
This kind of concern generally is unfounded. Private equity can be an excellent way to obtain the funds and expertise you need to grow your company. Before taking the leap, however, you should know the facts about these types of investors.
Private Equity Basics
Private equity investors buy shares in a private company intending to help grow and, eventually, sell the business. Limited partners provide the funds, and general managers select and manage the investments.
Private equity groups usually take a controlling or significant interest in companies in one of three ways:
- Venture capital. Here, investors focus on early-stage companies expected to produce strong revenue in a few years, or later-stage companies that are likely to generate increased profit in a year or two.
- Buyout and acquisition financing. Private equity investors use a new business plan and, sometimes, new management to improve a company's financial performance.
- Expansion or merchant banking capital. With this approach, investors focus on established companies expanding their operations or entering new markets.
Shared Control
A partnering company can use the private equity group's cash infusion to launch new products, make acquisitions or pursue other growth opportunities. Selling to a private equity investor doesn't mean losing control of your company. Owners generally retain a substantial interest in the business and, thus, also benefit as the company grows and is eventually sold.
In fact, selling less than half of your company allows you to retain full control. Even if you keep only a minority interest, you may be able to work out an agreement with the investor that keeps operating and strategic decisions in your hands.
Early Exits
Another misconception among some business owners is that private equity investors are only interested in their exit strategy. It's true that these groups realize a profit when they sell - so they can't be expected to hold on to an investment forever. However, they typically expect to work with your company over a period of five to seven years.
When it's time to sell, you may even have alternative exit options. You might be able to use bank debt to repurchase shares and recapitalize your company, find a new private equity investor to guide you to the next level of growth or raise capital from a strategic partner.
Importance of Expertise
Getting a fair price for shares in your company is vital to a successful private equity partnership. Before you seek financing, work with a professional business valuator to determine your company's current market value.
But price shouldn't be your only criterion for a private equity partner. You don't want to give up a chunk of your business to a high bidder that doesn't understand your company and industry, and that may have unrealistically high expectations for growth. This type of relationship is likely to sour when expectations can't be met. Instead, partner with an investor that shares your goals and understands the challenges you face.
Many private equity groups specialize in particular industries - so look for one with multiple business investments in your sector. Expertise investing in similar companies means your partner may be able to recognize patterns that aren't obvious to your management team. The private equity group also can introduce best practices from other businesses and give you access to a network of professionals to help - from recruiting talent to business partners.
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Whether to Use a Fairness Opinion
A fairness opinion is a formal review, typically prepared by a third-party entity (an investment banker or business appraiser) of an M&A deal's price, terms, and other financial characteristics. It assesses whether a transaction is fair to shareholders and others involved by comparing the deal with similar ones and evaluating any meaningful differences.
Fairness opinions generally analyze the underlying assumptions of the deal, as well as industry and economic trends. They also determine a range of prices that might be considered fair, impartial, and just for all parties.
Impartial View
Fairness opinions are often used when an M&A transaction isn't conducted at arm's length - by two independent parties - or at market prices, such as insider-led financing or a management buyout. Other transactions for which a fairness opinion may be useful include:
- Corporate divestitures.
- Leveraged buyouts.
- Recapitalizations and restructurings.
- Employee Stock Ownership Plans (ESOPs).
- Exchange offers or minority buyouts.
- Stock purchase and repurchase agreements.
- Court-appointed valuations in the event of a hostile takeover.
- Liquidations.
- Bankruptcy reorganizations.
- Dissenting shareholder disputes.
Sellers typically request a fairness opinion when an acquirer first expresses interest. This allows time for other prospective buyers to make competing offers if the original bid is at or below the low end of the fairness opinion's price range.
Not a Foolproof Tool
Both buyers and sellers use fairness opinions to shield themselves from potential lawsuits by shareholders who might claim they were shortchanged by the transaction. But these opinions don't guarantee litigation protection, nor do they necessarily reflect the full value of a proposed deal.
Fairness opinions, for example, don't address a deal's viability from strategic, operational, management, timing, or legal standpoints. They also don't offer judgments on the financial projections the buyer relies on for its bid price. Additionally, fairness opinions help sellers evaluate whether an offer is adequate but don't tell buyers whether they should make the acquisition.
Potential Conflicts
To get the most out of a fairness opinion, watch for conflicts of interest. Ensure that the professional who prepares the opinion is impartial and objective.
Conflicts of interest are typically signaled by financial incentives. For example, buyers shouldn't seek a fairness opinion from an investment banker who will receive a percentage of the transaction if it's approved. It's inadvisable for sellers to engage a financial advisor who runs a private equity fund that could potentially bid on the company.
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Confidentiality is a Price Multiplier
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What is the first thought in almost anybody's mind, when they see a sign on a business stating that it is for sale?
Most people think of giant furniture store banners proclaiming a "Going out of Business Sale!"
It doesn't matter if it's true or not, once the public sees that a privately held Company is on the market, the perception is that the business must be doing poorly and it is only a matter of time before it closes its doors and any unfulfilled orders or unclaimed product will vanish into thin air. Customers stop ordering future purchases, Contractors start shopping around to the competition, and those new contracts the owner had been chasing for years decide to go with someone else who is not telling the world they are going out of business. Soon, the business with the sign on the wall does begin to lose custom, revenues decline, employees leave, vendors tighten credit controls, and the business does in fact, "go out of business."
This is ironic because the best time to sell a business is in fact when it is doing very well. When a business shows record profits, new customers are flocking to the store, and the owners are spending all of their time negotiating new contracts for future orders, leaving the operations of the business to a trusted management team; this is the moment when the business if offered for sale discreetly, will bring the most cash to the owner.
If done correctly, it is possible to sell a business without letting anyone in the general public know. Consider how many businesses you have seen over the years, with no indication that they were for sale, all of a sudden posting "Under New Management" signs on reader boards, in windows, or on their regular advertising. Few people ever assume these businesses are in danger of going bankrupt. Instead, they are often seen as being rejuvenated, with new owners investing their efforts into growing the business. "After all, they just purchased it, of course, they are going to focus on growing it, and they will be operating for the long haul."
Have you ever wondered how these businesses were able to be sold, without ever leaking the information that they are trying to sell?
The process goes like this:
First, the business owners have to decide whether planning an exit strategy makes sense. Many businesses fail to plan for succession from one set of owners to the next. This leads to problems, such as waiting too long to sell, allowing revenues to begin to decline, and the owners no longer as interested in expending the effort required to grow the business, issues like these generally end up in a business simply closing its doors or selling for a drastically reduced price. A planned exit strategy allows Companies to remain in business for many years after the originator has retired. Providing jobs for its employees, making sure its customers continue to receive the service they expect, and most importantly, a planned exit strategy allows the owners to control the timing and condition of the transfer.
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6 Clauses to Negotiate in the Investment Banking Engagement Letter
The investment banking engagement letter is the official representation of your company’s relationship with your M&A advisor or investment bank, and as such should be carefully considered. The process of negotiating the letter can also provide helpful insight into a prospective bank’s priorities and operations, and reveal how well your interests are aligned. Even if your company’s legal counsel is handling negotiations, it’s important to understand the key points of the agreement and how they do (or do not) represent the interests of your business.
Here are six of the most important aspects of the investment banking engagement letter to keep in mind as you begin negotiations.
1. Scope of Services
What role is the investment banker serving, and what’s the end goal of the engagement? A financing transaction? A purchase? Both? Stating this in the engagement letter ensures that each side’s goals are aligned both with one another and with the proposed fee structure.
The investment bank will typically detail a list of included services in this section of the engagement letter. Some of these might be obvious and apply across almost every engagement (e.g., reviewing financials, soliciting financial partners and/or acquirers), while others will vary depending on the bank and the company’s needs (e.g., developing marketing materials, providing valuation services).
2. Exclusivity
It’s not uncommon for owners to balk at the exclusivity clauses in the investment banking engagement letter. Even if you do all the research in the world, it’s hard to commit to entrusting one advisory firm with your business. However, the truth is that it can be very hard to find a high-quality M&A advisor or investment banker without agreeing to exclusivity. From the advisor’s perspective, a retainer isn’t enough to justify the many hours of work they’ll spend preparing your business for a sale or financing. Consider, too, that managing multiple investment banks would be an onerous undertaking for you as the business owner, and could result in a lot of confusion and uncertainty.
When negotiating engagement letters, then, the question is often not whether to grant exclusivity to a bank, but rather for how long. Typically, the bank will advocate for longer exclusivity periods and the seller will want shorter periods. Six months to a year is fairly standard in most cases, but the period can vary depending on the complexity of the transaction, how much preparation the business needs before going to market, and other factors.
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Nationally Established Transmission Business for Sale in Texas
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VR Office in Apollo Beach FL Sold a Florida-Based Distributor of Heavy Machinery and Components for $3,000,000
The business was a long-time supplier of heavy machinery, parts, and consulting services to a niche industry vertical. The company was acquired by a strategic buyer seeking a presence in the market at over 5x EBITDA and, all cash at closing. The acquirer brings to the table a deep bench of industry-specific capabilities and talent with which they intend to build on the great foundation of the company. The seller will remain with the company to lead the merged entity into the future.
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Thinking of selling your business or looking for an established
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Why Amazon Likes Household Robots
There are said to be people who like vacuuming. For most, however, it is a rather chore. So it's no wonder that devices that do at least some of the work for you have become big sellers. Robot vacuums have been able to damp mop for a few years now, and many have an extraction station, so you don't have to empty the little helpers after each pass.
One of the leading manufacturers is iRobot. Its boss, Colin Angle, used to assemble robots at university, but now he is selling his company to the Internet retailer Amazon for $1.7 billion.
Devices such as the talking Alexa boxes or the smart doorbells from Ring are not necessarily Amazon's main business. But for one thing, many expect the field to grow strongly. iRobot CEO Colin Angle, for example, sees aging societies as a big sales market. "We need robots so that people can live independently for longer," he told the SZ several years ago. On the other hand, there is an even more important reason for Amazon to make this investment: data.
Cheap vacuum robots drive blindly through the area; if they bump into something, they turn it off in a random direction. With this principle, they eventually manage to cover a room completely. More expensive devices like those from iRobot, on the other hand, use cameras, lasers, and sensors to orient themselves in space. Since they usually also communicate with servers of the manufacturer, the latter knows the floor plans of the apartments. Data protectionists consider this even though Amazon promises not to sell its customers' data to third parties.
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VR is The Only Remaining Founding Firm of The International Business Brokers Association ("IBBA").
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Have You Ever Considered Selling Businesses?
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