Equity funds have become an important staple in the world of capital today, nurtured in part by a booming increase in baby boomer savings, coupled with a worry about the stability and security of the public markets. As retirees watch the volatility of stock market performance today, they increasingly begin to feel that perhaps a private ownership stake, in a real, live, operating company, may in fact be a more prudent place to camp retirement funds.
A sound direction for the future
Equity fund ownership of safety companies in today’s markets can offer owners sound direction for the future, and often reduced risk as well. These funds were not exciting buyers 20 years ago. In fact, in olden days, the equity fund buyer was often the outlet for the desperate. They paid less than strategic buyers, and they sought to turn the investment quickly, with resale often in 3-5 years. Today, equity funds pay market price, and hunt aggressively and enthusiastically for businesses in segments promising growth. Safety equipment manufacturers and distributors often meet those criterion, and look like exciting places for investment.
Often the equity fund also offers, and in fact even PREFERS, some continuing role for the seller, and a related ownership stake in the business for the future. Sellers can cash in on a large percentage of the value built, and still maintain a potential stake in future “upside” for the business.
Securing a solid financial future
For example, if the equity fund buyer pays $50 million for a seller company, they might source the $50 million with $25 million debt from senior lenders, coupled with $25 million of invested equity. In an “average” equity transaction, they might ask the seller to retain 20 percent of the ownership. To retain that 20 percent, the seller would need to reinvest 20% of the equity being input into the deal. In this example equity input was $25 million, so the re-investing seller would need to put back in $5 million ($25x 20%). At that stage the seller would have $45 million, free and clear (his $50 million price, less his $5 million reinvestment), and would keep the remaining $5 million reinvested for his 20 percent stake in the future. At this stage the owner has secured a solid financial future for his family, but he still has potential to continue financial growth, by performing well in the business.
Secondary benefits
There are also a number of secondary benefits that owners can enjoy under the tutelage of an investing equity group. The average business owner is excellent at some parts of the business, but often not at ALL aspects of business management. He may be great at sales, or he may be a magnificent technology developer, but he might be less skilled at perhaps financial management, or human resource development. Equity fund investors come in, assess needs, and help the owner to recruit and train highly capable people to fill in the blanks. Owners can then return to enthusiastic focus on the areas of the business they do best. It can be a win/win operation.
Also, as new capital may be needed for growth – either for add-on acquisitions, or for significant capital expansions, the equity fund can fill that need, with their resources and expertise.
A different approach to exit
We have seen clients who literally have almost doubled their selling results, by selling to an equity fund, retaining a part, and taking two bites of the apple with a follow-on sale later. And we have seen multiple occasions where key number 2 or 3-ranking staff have also taken and benefited from ownership.
It’s a different approach to exit, but it can be one that results in a very happy ending.
One more option for you
Equity fund investors in the world of safety products have become common and very competitive today. It is one more set of options for the private company owner of 2014, and it’s one well worth considering.