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How To Raise Capital AND Retain Partial Ownership Of A Business

By Generational Equity

Partial ownership and raise capital of a business

Quite a few of the business owners that attend our exit planning workshops are not there to sell 100% of their companies. Many are there because they need capital for growth and are interested in learning about some of their options for doing so. Essentially each owner wants to attract investors to acquire a percentage of his or her company’s stock and re-capitalize the business for expansion.

Although Generational Equity generally focuses on finding buyers that want 100% of a target’s business, we do provide partial sale services. This is where a buyer acquires 51% (or more) of our client’s stock and retains existing management to help grow the business. Normally the types of buyers who create these deal structures are private equity firms.

This arrangement can be quite lucrative for all parties involved; in fact around 26% of our deals closed in 2014 were with private equity groups (PEGS).

However, throughout the years we have cautioned business owners that are interested in this type of investor to make sure that they are realistic and do their research prior to approaching PEGs, especially if they are going to do so without professional assistance and guidance. Here are some issues to be aware of if you, too, are thinking of approaching this group:

  • Have realistic expectations of your company’s value
  • Create documentation that contains the typical information equity firms want to see
  • Understand that these deals take time to nurture and close
  • Be sure to approach equity firms that are interested in your industry/size of company
  • Get legal advice to ensure that your interests are protected
  • You need to invest money to make money

Since many of these are self-explanatory, I will only highlight a couple of the most important ones for you here. To learn more, attend a Generational Equity M&A seminar. These educational meetings cover a full range of buyer types, including equity firms, and how deals like this can be structured.

What Is My Business Worth?

One of the most important issues you will face is your expectation of the value of the business. All too often business owners are approached by Larry at the country club, who 20 years ago owned a business. After a couple of cocktails Larry tells you that your business is worth XXX millions and that you shouldn’t accept a dime less. Over time in the business owner’s mind, Larry’s napkin valuation typically grows to the point where reality is far off the horizon.

Don’t let this happen to you. If you expect to sell 60% of your company to an equity firm and retain 40% of the new entity, you need to know what 100% of the company is truly worth in today’s market.

On the flip side, some business owners undervalue their businesses because they focus on the negative issues that take up most of their time to control and maintain.

You need to avoid both of these scenarios by having your company valued by a professional business valuation firm (and not an appraiser of equipment, your company is most likely worth more than the depreciated value of your equipment). A professional valuation firm will use a variety of methods to determine the most accurate range of value for your company.

On a side note, Generational Equity’s valuation team was named Valuation Firm of the Year in 2020 by The M&A Advisor. Quite frankly, no M&A team in the lower middle-market has evaluated more businesses than our group. You need to find a company that can provide this type of service as well.

One last thing about valuations: Your accountant may be able to do this, however, chances are good he is not an expert in valuation methodologies and his/her value conclusion will probably be torn apart by an equity firm.

Correct Documentation is the Key

OK, assuming that you now have an accurate value range for your business in hand, you need to create documentation that equity investors want to see. You have to keep this in mind: Professional buyers with these firms will look at literally HUNDREDS of opportunities every year. This means that you need to create information and provide it so that they can quickly decide if you merit further review.

Two key pieces of documentation you will need are:

  1. A Confidential Business Profile (CBR a.k.a. a Teaser Letter)
  2. An Offering Memorandum (OM)

Note: Both of these need to be based on “recast” financials.

The CBR is a one- or two-page summary of your OM, only it is written in such a way to disclose just enough information to attract interest WITHOUT letting folks know who you are. What you need to do is provide top and bottom-line financial data for three historic and five projected years, explain why your buyers buy from you, what future opportunities your company provides, and generally where you are located (state and region typically).

If you are not a professional writer or an investment banker with experience, this document can be a challenge. It needs to be creative but not bombastic. Avoid terms like “industry leader,” “only one of its kind,” and “no competition” as you prepare your teaser.

The OM is your 60- to 100-page document that you provide after a target has signed your non-disclosure agreement (NDA).

Note: Your NDA needs to be drafted by an attorney. See the fifth bullet point above.

The OM should document your past and, in great detail, explain your future growth. Again, avoid hyperbole here. If your company has been growing at a 5% clip for 20 years and your net profit margin has hovered around 8%, be careful not to suddenly show 30% growth and 15% margins in your OM. It will be discounted and most likely, you won’t get a follow-up call.

Why Hire An M&A Professional?

If you want top dollar for your company, odds are better if you hire an M&A professional to represent you. Certainly equity firms acquire privately held companies all the time that are not represented by advisors. But they do so to their benefit, not necessarily the business owner’s. In fact, in a recent article on the Axial blog (Axial is a leading B2B website matching business owners with capital providers), their research found this:

“In the study, entitled Does Hiring M&A Advisors Matter for Private Sellers?, Agrawal et al. discovered that ‘private sellers receive significantly higher acquisition premiums when they retain M&A advisors.’ Although ‘top-tier’ intermediaries offered the highest acquisition premium, the benefit of the M&A advisor held true across all deal sizes.”

You might ask, why does this happen? Simple: Hiring an M&A professional helps you with all six of the issues listed above.

Once retained, a professional firm will perform a thorough evaluation on your company to determine value. Then, they will create documentation that will help attract buyers and close deals. They will guide you through the 12-18 months it takes to close most deals and help you understand the process.

An experienced M&A advisory firm will approach those equity firms that make sense based on relationships they have developed with them. And finally, in conjunction with your legal counsel, they will help to ensure that any deal created protects your interests while getting you the most value in both the short and long term.

So it is a good idea to spend some money to make some money!

As mentioned, Generational Equity holds educational seminars on these topics since we know that most business owners may have a vague idea of their options and what they want to do; however, they have never formally created an exit plan. We are here to help. If you would like to learn how, give us a call at 972-232-1121 or fill out a contact form and we will give you all the details.

Carl Doerksen is the Director of Corporate Development at Generational Equity.

© 2021 Generational Equity, LLC. All Rights Reserved.

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T.D., thank you so much! You are a great leader! I love how you are using your gifts and talents to better others. You are clearly a GREAT COACH! This 3 day session undoubtedly changed the future of our business, and very well may have been the sole catalyst to save my company, my health and my marriage! A genuine “thank you” from the bottom of my heart.
Bryan D. Horn, Owner, Over Under Clothing
I must say that I have never worked with a more driven, competent and focused individual as Don Ho.
Jay Dinnison, Owner of Sharpe Mixers
The process was much more involved than I expected and your help, experience and advice was a big factor in making the negotiations go as smoothly as possible.
Terry D. Wickman, President, Keytroller
Thank you again for all your guidance and support. Any company will achieve what they intend, if they have you on their team!
Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
I wanted to take this opportunity to thank you for all that you have done for us. Not only did you take care of all the aspects of the sale but took extra care to make sure we knew what it looked like every step of the way. I will definitely recommend your company to anyone that is in a position to or looking to exit their business.
Shane and Johanna Kline, Owners of Vision Upfitters
Generational Equity educated and informed us – so that we could be on the upside of a good decision (to sell).
Bil MacLeslie, CEO, ipHouse
I need to say an immense thank you to Don Ho for his stellar work ethic, attention to detail, and tireless effort. Also thank you to the whole crew at GE! Without you, Don could not do such a phenomenal job. We were shooting for closing and funding before the end of 2020, due to the uncertainty of the political landscape and taxes. I am happy to report we closed last week and will be funding tomorrow.
Dr. Caty J. Catron PhD, RN, VA-BC – Owner, Vic The Picc, LLC
The help you provided us during each step of this process made us feel very comfortable and confident we were selecting the right approach to transition our Company.
Andy Graham, Vice President, Modern Heating & Plumbing
I would like to thank you and your firm, Generational Equity, for being our valued advisors in our journey.
Bil MacLeslie, CEO, ipHouse
Through the sale process, Generational brought in several interested buyers and we closed in about 6 months. I am so glad I accepted that invitation to the conference and could not be happier with the whole process. The team at Generational coupled with their knowledge and guidance was so valuable that in the end, I know I could never have done this on my own!
JoAnn Ellis, Owner of Fondren 5 Star Kennels
We knew it would be a difficult task to have someone really understand our business and our market, prior to researching a possible buyer, so it was imperative that we found someone of your caliber, with definite proven experience in this area.
Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
Thanks to you, the entire GE team and especially Michael Goss for driving a great valuation, coaching me and driving the process across the finish line. Please let me know if there is anything I can do to support GE going forward.
Tom Currier, Former President & CEO, Rackmount Solutions
I decided to attend the conference and hopefully receive some guidance on how to structure an exit plan of my business. Upon arriving at the conference, I was so impressed with the presentation given by Generational Equity that I set a future appointment that week to discuss the possibility of selling my business with their Senior Managing Director David Robinson.
JoAnn Ellis, Owner of Fondren 5 Star Kennels
Generational Equity’s assistance was invaluable in compiling and marketing our business.
Bil MacLeslie, CEO, ipHouse
We thank you Eric and Generational Equity making our dream come true.
Larry Moore, Owner, A Company Portable Restrooms
We were happy to see the interest in our company and what we cherished has not just a valuable company but an important company to the communities we served in.
Larry Moore, Owner, A Company Portable Restrooms
We were represented by Michael Goss with Generational. The due diligence was grueling and exhausting, but Michael propped us up and kept us motivated throughout the process. Debi and I continued to ask each other how we could possibly make it through this process without the assistance of Michael. Michael's professionalism and knowledge is absolutely amazing, and we are so blessed to have had him by our side as we made our future dreams come true.
Bob and Debi Lee, Owners of BL Technology, Inc and BL Tl Services, LLC
The professionals at Generational Equity then helped develop a roadmap for enhancing the value of the firm and an evaluation report. This was completed by June 14, 2021. We then developed the Confidential Information Memorandum and put Taylor Studios, Inc. on the market by July.
Generational Equity’s professional staff helped me every step of the way. Their network and professionals are the only reason I sold my company this quickly. For me this is a once in a lifetime sale and I was unfamiliar with the process. I was able to lean on them with questions and concerns.
Betty L. Brennan, President, Taylor Studios
Your wisdom and experience were invaluable to me during this once-in-a-lifetime transaction.
Ralph Noblin, President of Noblin & Associates
Michael worked tirelessly, He followed every lead meticulously and urgently to make sure nothing was missed.
Robert Evans, President and CEO of Mealtracker Dietary Software
I am pleased that I was able to work with Andrew Byrd throughout this experience. From the first meeting we had in Minneapolis I felt that I was in good hands. His knowledge and expertise is second to none. He guided the process consistently throughout. I feel lucky that I was pared with Andrew and could not be happier that I chose Generational Equity to handle this major life event. Thank you Andrew and GenEq for everything!
Eric Erlandson, Owner, Action Fastenings, Inc.
We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.
Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
The most important contribution I think Ahmad made was with his personality and work ethic. He is sincere, efficient, and very hard working. He was available to me at all times, whether it was for specific detail of the negotiation or just to talk through the bigger picture. He listened, advised, and recommended, but never forced his idea or opinions. In the time we worked together, he became a valued colleague and also a friend.
Salvo Stoch, Founder and CEO of Sleeping Partners
After attending a conference with GE, I decided that the value they bring would be worth the expense and as soon as I started working with them, I realized that was the right decision. When we started to get LOIs, Fred Zweifel took the lead on the communication and supported negotiations throughout the process, which got tricky as we moved forward. I learned that it can be common for companies to make a great offer then work to erode that price with their discoveries, but Fred and the GE team kept that from happening.
Caroline Connelly, CEO, OptoTest
I couldn’t have asked for a better team than Michael and Deborah. We couldn’t have done it without them.
Robert Evans, President and CEO of Mealtracker Dietary Software
We had the pleasure of working with Mr. Ahmad Behjati Managing Director, M&A, for Generational Equity during our acquisition of Papa's Dodge in late 2021. Generational Equity and Mr. Behjati represented and marketed Papa’s Dodge. As our primary contact, Mr. Behjati was professional in every facet of this acquisition process, conveying valuable advice most times and assisting us in every step of the process.
Rick Greene of Dobbs Equity Partners LLC
I quickly recognized that Don was working for Sharpe Mixers above all else, and held our interests above others.
Jay Dinnison, Owner of Sharpe Mixers
Greetings Mike. Thank you for the captivating and compelling presentation you made at the Phoenix presentation last week. Over many years in business yours was the most informative and well-presented presentation, on any subject, that I have ever attended! Your energy and enthusiasm combined with your concise and captivating support of your positions with easily understood examples and data was compelling.
Pete L.
I wanted to write you a quick letter to express our appreciation and our delight on the outcome of helping us through the process of our recent sale. We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.
Terry D. Wickman, President, Keytroller