A severe reduction in the number of merger and acquisition transactions due to the credit crunch has left many business owners wondering how they'll be able to successfully exit their businesses over the next few years.
In a matter of mere months, they've watched an extraordinary seller's market for privately owned "middle market" companies evaporate as the credit crunch has frozen many credit markets. Once lofty valuations have vanished leaving executives wondering how to gain liquidity at a reasonable valuation from an asset that often represents the majority of their net worth.
Business owners crafting their exit strategies find themselves with few choices: wait until the financial markets recover, accept a valuation significantly less than a year ago, or find another solution. There is another viable option left if a business has strong fundamentals - a leveraged recapitalization transaction which is often referred to in industry parlance as a "recap".
For many, waiting may not be a viable option and taking a lower valuation is not likely to be acceptable, a recap is something worth considering. In essence, a recap results in the restructuring of a company's balance sheet with the company taking on additional debt that is used to fund the repurchase of shares from the owner or a large dividend to the owner. The end result being a more leveraged company.
Typically, a recap involves a private equity group as a sponsor, although often the transaction can be done directly with a mezzanine lender using quasi equity like debt that would be less expensive and dilutive.
In addition to providing most of the equity needed to complete the transaction, the sponsor arranges new senior bank debt and possibly mezzanine/subordinated debt. The result is that an owner's stock is exchanged for cash and a portion of the capital stock of the newly capitalized entity.
Business owners who want to retain an ownership interest will find that a recap can be very attractive as it provides the owner with the opportunity to receive another payoff in the future when the sponsor exits the investment. Proceeds from the recap and subsequent sale can often exceed the value obtained through an outright sale.
In addition to getting substantial liquidity, business owners continue to operate the business with considerable autonomy while gaining access to capital to support future growth. Today, many sponsors are accepting minority ownership positions.
So what kind of companies are investment firms seeking? They look for well established companies with consistent record of growth in sales and earnings, a significant market share or defensible market position, one that may serve a niche market, an experienced management team, and projected operating results that meet or exceed historical results.
It is important to note that having the owner remain as an operator as well as a partner provides investment firms with another level of comfort when entering into a transaction, which is especially important in times such as today when everyone has become very risk adverse.
If all goes well and the company continues to grow as projected, the owner's equity stake could be worth from 25 percent to 50 percent or more of the initial payment the owner received upon consummating the recap of the company when the investment firm exits the investment which is usually three to five years.
Of course, that assumes that stability will have returned to the financial markets. As we all know, it took the financial markets four or five years to recover from the savings and loan crisis of the early 1990s.
Leveraged recaps are not suitable for all companies. Ultimately, a sale to a strategic corporate buyer may be a best option for an owner especially if the owner is seeking to retire and no longer run the company.
With the unprecedented turmoil roiling virtually every sector of the financial markets and unlikely to end in the foreseeable future, a leveraged recap may be one of the few viable options owners have to exit sooner rather than later.
FRANZ VON BRADSKY is chairman of the August 7, 2008 Northwest Growth Financing Conference in Seattle, a director of the Seattle chapter of the Association for Corporate Growth and president of Green Tree Capital. Reach him at 707.251.0994 or email him at Green Tree Capital.
Article Source: http://EzineArticles.com/?expert=Franz_Von_Bradsky
สมัครสมาชิก:
ส่งความคิดเห็น (Atom)
ไม่มีความคิดเห็น:
แสดงความคิดเห็น