When we first meet business owners wishing to sell, many have a pre-conceived notion of what a sale may look like. They may believe they have to sell 100% of the company, or that they will be forced to stay, made to leave, etc. The two middle-market M&A deals we recently closed illustrate how deals can be structured to give owners what they want. This is part one.
Note: The “Tale of Two Deals” series explores different aspects of two deals that we closed recently in the same week.
Partial Buyout, Recapitalization, Equity Rollover
With one of the recent closed deals, there were three owners. Two of the owners had started the company based on their expertise, and the company grew initially based on their excellent reputation within the industry. The third owner was younger and was able to grow the company in the later stages using web and Internet technologies. Although two of the owners were starting to think about retirement, the younger owner was very much engaged with continuing to grow the business and enjoying his role as CEO.
A private equity (PEG) deal was ideal in this case, because it allows the young CEO to continue running the company as a separate entity, now with professional help and guidance. The deal was structured so that the CEO was able to use some of his proceeds to “buy back” stock in the company (since this was an asset sale, there is a new company formed – so indeed the CEO is actually buying stock in the new company). This is typically called an “Equity Rollover” or a majority recapitalization.
Of course, an important aspect of this equity rollover is what the terms are that the young CEO buy back in at. In this case, the CEO was able to buy back the stock at the same price as the PEG was buying the stock at – a very fair deal. In addition, there was some debt used in this deal so the CEO was able to leverage the deal just as the private equity company was doing. The CEO and PEG are not completely on equal footing, as the PEG has (as is common in private equity deals) some preferences and benefits as defined in the purchase agreement. For example, it things go badly the PEG will usually be allowed to get their money back before the CEO will.
The two other owners, looking down the road towards retirement, were not as excited about rolling a lot of their money back into the company. Understandably so. They decided to buy back a little bit of stock, but mainly taking most of their chips off the table.
In summary, the three owners got a deal that fit where they are in life and what risks they wish to take at that stage. In the next post we’ll look at the other deal, and what it means to sell 100% of your firm to a larger company.