Terry Stidham

Leading Mergers and Acquisitions Advisor  

“For the private business owner, the sale of their company will most likely represent the single largest financial event of their life. You only get one chance to do it right.”

www.genequityco.com

Pension Pulse: Pressure Is On Private Equity?

Pension Pulse: Pressure Is On Private Equity?: Ryan Dezember of the WSJ reports, For Private Equity, Cashing Out Is the Easy Part : Carlyle Group LP's second-quarter resu...

Deal Structure for Private Equity Financing

Deal Structure

Terry Stidham

Earlier this week we talked about how Private Equity could be an alternative to bank financing.

You need to know going in that there will two important parts of the deal –

1.    Amount of capital financed

2.    Terms/ Conditions

Answer these key questions before seeking financing from PE:

·         How much do you need?

·         How will the capital be used?

·         How soon and over what time period?

·         In what form of equity are you willing to structure?

·         What are you willing to give up in terms of control?

All private equity (PE) deals employ equity in some form, but the actual deal may use one or more instruments ranging from common stock to convertible debt. Investments may be made up front or over a period of months or even years.  

The PE investor will assess your funding needs and propose a funding structure. The final structure will be determined through discussions of how a business relationship can be built that meets your company’s funding needs and the PE firm’s need to ensure the success of your business, and their investment.

The Issue of Control is a key consideration one must make when using financing from PE. Business owners who have devoted years to building a business can find handing a majority stake over to an investor very daunting, yet many deals require just that: As a rule of thumb, most PE deals involve a 40 to 65% equity stake. If the investor takes a stake of less than 50%, the conditions tied to that stake are likely to be more rigorous so that the investor can protect its investment and ensure that it has the ability to direct the firm to extraordinary returns in the long run. Once the equity stake is above 50%, the terms are likely to be less stringent as the investor will have a voting majority on the board. In either case, the deal will also involve board seats and management interaction to ensure that the investor can actively mentor the business owner to a successful outcome.

Whatever the level of equity involved, business owners are likely to end up wealthier and businesses are stronger after the deal. PE firms do not invest unless they are confident in a company’s ability to grow. The capital it provides is the fuel that helps to make that growth happen which, in turn, raises shareholder value.

The math is simple: a smaller share of a large and rapidly growing company is worth more than 100% of a small company. And even if voting control is given up, the investors will most likely be committed to growing your vision and keeping the senior management team intact. You and your team have created the success to date and is the number one asset that the investor values most. PE will provide the funding to cash flow the growth and provide management tools and expertise to fill the gaps.

Many deals involve one or more of the following instruments:

·    Common stock. While equity stakes are often taken, common stock offers less protection for the investor than preferred stock and is therefore rarely the first choice.

·    Convertible preferred stock. Preferred stock that converts into common stock, usually upon an initial public offering (IPO) or the sale of the company. The preferred stock can be either participating (it gets a regular dividend) or non-participating (no dividends are paid).

·    Convertible debt. A PE firm may seek to start the investment out as a loan that is convertible into preferred or common stock upon certain events.

The ultimate structure of the deal will depend on a number of factors and may include some or all of the equity forms above, as well as a variety of terms and conditions that are based on the circumstances of the deal and the needs of your company

Another factor to consider in the structuring of the deal is timing: when the funds are received. Generally it depends on what they are needed for; for example, funding for an acquisition will be tied to the timing of the purchase. However, funding for a management buyout may be staged over time to ensure that the senior manager being bought out remains committed to the company’s future for some fixed timeframe.

Investors will aim not only to build your company in the short run, but also to sell or liquefy their investment in the long run. Most funds raised by PE firms have a 10 year time horizon and are generally more patient than venture capital funds. Typical liquidity events include selling the company to larger player in the marketplace, going public, or being bought out as the company raises substantially more equity and debt capital in the future. There are some traditional wealthy family funds that don’t have any particular time horizon and consequently may stay in the investment so long as it’s making economic sense to do so.

Most investors will consider an exit strategy at the time they structure a deal. Others will work to have a long run relationship with the intention of remaining a business partner until the day that a firm with much larger resources is required to take a company to the next step. In that case, the original PE firm may stay on as a minority shareholder or the new partner may buy out the first firm’s interest.

Another Key Consideration when seeking private equity is finding the right balance between realizing your vision, gaining outside help in terms of financial and executive experience along with a team that you can work with. You are more likely to create a successful deal if you seek a PE firm that shares your vision and has the resources to implement.

Contact us today to discuss your situation and what you need to do next to get in front of the right PE group for you business needs.

 

Terry Stidham,  Managing Member and Founder of Target Search Group. Mr. Stidham is a Business Development Leader with extensive knowledge of the M&A process, combined with an in-depth understanding of the constantly changing global capital markets environment.  He has served as the head of entrepreneurial organizations as well as Fortune 500 companies.  He specializes with mid-market companies in a diverse array of industry sectors from service and manufacturing to technical and professional firms.Mr. Stidham speaks the language of both the seller and the buyer having vast experience on both sides of the transaction. He has been directly involved in the execution and successful closing of hundreds of investment banking and corporate finance transactions. 

Financing for Your Growing Business

GROWTH CAPITAL

by Terry Stidham

You just left another meeting with another bank for financing and they told you once again that if you did not need the money they would be glad to make you a loan. Somewhat of a catch 22 for the business owner and the banker whose hands are tied by strict debt-to-equity ratios. The frustration is obvious, yet the solution may be just around the corner with Private Equity (“PE”) funding.

Private Equity Financing can be somewhat of a mystery for many successful companies facing financing challenges, but can be a highly effective source of funds. Many business owners assume that it is only available for the largest companies that are looking to be acquired. This misconception arises from the industry’s history: private equity grew out of the leverage buyout firms that purchased and broke up major conglomerates in high profile deals during the 1980s. The assumption was that the individual businesses were worth more than the sum. Other people only know the venture capital part of the industry, which funds startup companies and received a lot of attention during the high tech boom. Neither picture is complete.

Today, Gordon Gecko’s mantra of “greed is good” is long gone and the .com boom has busted, yet the PE industry is alive and well. The complex industry gathers private and institutional money in funds with a range of objectives. They include:

• Buyout Funds
• Hedge Funds
• Venture Funds
• Growth Capital Funds
• Dedicated Capital from High Net Worth Individuals

Private equity firms place its money in one or more funds to make investments in what are referred to as “portfolio companies.” They typically have a charter which sets out well-defined parameters for investments to be made by the fund, including:

• Nature of Investments - Some funds like high-growth companies, others prefer investments with stable cash flow or dividends. Still others prefer turn-around situations.
• Geographic Scope - Some funds will primarily invest in a certain region or part of the country.
• Preferred Sectors - Some funds are generalist funds that will look at just about any sector, others focus on one particular sector, such as transportation, infrastructure, telecommunications, etc.
• Investment Size - Most funds will specify a minimum or maximum investment size.
• Ownership Interest - Some funds insist on control, others will take minority interests.
• Fresh Equity - Many financial investors are not willing to buy out shareholders, they only want to inject fresh equity into a company (e.g. to fund growth). Others will consider a combination of fresh equity and buying out existing shareholders. Buyout funds will want to buy 100% of a company.

PE firms provide capital in return for an ownership stake. They usually invest cash in exchange for convertible preferred shares in the portfolio company. While many firms focus on larger businesses seeking $50 million or more in funding, there are a number of PE firms that work with growing businesses valued at $5 to $50 million and are seeking as little as $2 million in funding. The funding can take many forms ranging from common stock to convertible debt, but unlike traditional funding sources, the PE firm becomes actively involved in the companies it funds through board representation and active mentoring.

 

It is therefore important to find a good match between a PE fund and a company. It is likely a waste of time to enter into discussions with a fund if the applicant company does not fit the fund’s criteria. So what does a private equity firm look for in its investment choices?

• A Solid Business Opportunity - that reflects its acquisition criteria (e.g. growth, size, geographic parameters, etc.)
• Exit strategy – who are the likely buyers for the company? What are the chances for a successful exit?
• A Strong Management Team - who is prepared to stay until the exit of the fund. (An owner-manager who is cashing out is often too high a risk for the private equity investor.
• Strong Corporate Governance – good decision structures, reporting systems, and strong documentation. Private equity investors seek management teams that are highly motivated, prepared to agree to ambitious goals and prepared to work extraordinarily hard to achieve significant financial gains. Conversely, if results are not forthcoming, managers that own shares may find their ownership diluted.
• Manageable Risks - No actual, pending or potential litigation. Minimal potential for surprises on the downside.

 

After the due diligence, the investment committee (or at least certain members) will usually review the due diligence report of lawyers and other advisors, and the proposed Sale and Purchase agreement. 

 

PE investors are an important potential source of financing for mid-sized firms that needs to be explored.

 

If you have a business that is seeking financing then contact us today to discuss what is needed to get in front of the right PE group for your business.

 

About the author: Terry Stidham is a Sales and Business Development Leader with extensive knowledge of the M&A process, combined with an in-depth understanding of the constantly changing global capital markets environment. He has served as the head of entrepreneurial organizations as well as Fortune 500 companies. He specializes with mid-market companies in a diverse array of industry sectors from service and manufacturing to technical and professional firms.

Mr. Stidham speaks the language of both the seller and the buyer having vast experience on both sides of the transaction. He has been directly involved in the execution and successful closing of hundreds of investment banking and corporate finance transactions. Mr. Stidham has instructed thousands of business owners on how to prepare for a successful exit. He improves operational efficiencies leading to significant increased value.

 

Should Foreign Buyers Acquire or Go Greenfield in the US?

ACQUIRE or GREENFIELD?

by Terry Stidham



The answer to this question can depend upon a combination of many factors. They won’t all necessarily point in the same direction, but it’s important to weigh each in your decision process.

Greenfield Investments are foreign direct investments where a parent company starts a new venture in a foreign country by constructing new operational facilities from the ground up.

Acquire or go Greenfield?

Acquire - In the case of an acquisition, 

• How similar is your product line to that of the target? 
• Are there issues with proprietary or sensitive technology?
• What place will the U.S. venture occupy in your global structure?
• What is the scope and difficulty of the integration task that you’d be taking on? 
• How relevant is the cultural gulf between the two groups you intend to knit into a team? 
• And at what pace should you move?

Generally, acquisitions can get you into the market much faster and help you pre-empt competitors. But the price tag can be hard to quantify because considerations such as stay agreements, management, recruiting and integration carry their own costs. An acquisition also depends on synergy capture.
 

Greenfield - With a Greenfield investment, it’s important to evaluate your own organization’s degree of experience doing business in the United States and the scale of the entry you’re attempting.

• Do you have the strengths in management and technical competence, or are you looking to bolster one of these areas? 
• And what type of Greenfield move are you considering: licensing, a joint venture, or starting a new entity from the ground up?

In contrast, Greenfield investments make it easier to stage or phase commitments which give investors more direct control over risk management. However, it takes longer to build something new than to add it to your organization with the stroke of a pen.

 

Questions behind the questions

• Are the customers, suppliers, and service providers you’ll work with in the United States ready for a “new face” in the market, or is their comfort with an existing entity an asset?
• Is it more important for your U.S. operation to prosper on its own terms as a market presence or for it to serve the larger needs of the global organization?

Get Started

If you’re considering this choice, you probably aren’t operating in a vacuum. Compare the top handful of acquisition targets on your list with the top handful of Greenfield opportunities. Which ones offer:

• The more timely assimilation into your target market?
• The easier route to capital repatriation?
• The preferred security for your processes and knowledge?
• The more favorable tax advantages?

 

About the author: Terry Stidham, Managing Partner of Target Search Group (TSG). TSG is a business development firm providing mid-market deal flow and investment opportunities for a select number of private equity and corporate clients. TSG sources and originates investment opportunities that fit their client's strategy, size and focus on an opportunistic and a specific search basis. 

Mr. Stidham is a Sales and Business Development Leader with extensive knowledge of the M&A process, combined with an in-depth understanding of the constantly changing global capital markets environment. He has served as the head of entrepreneurial organizations as well as Fortune 500 companies. He specializes with mid-market companies in a diverse array of industry sectors from service and manufacturing to technical and professional firms. 

Mr. Stidham speaks the language of both the seller and the buyer having vast experience on both sides of the transaction. He has been directly involved in the execution and successful closing of hundreds of investment banking and corporate finance transactions. Mr. Stidham has instructed thousands of business owners on how to prepare for a successful exit. He improves operational efficiencies leading to significant increased value.