Structuring and Financing a Partner Buyout

CAPITAL RAISING | MERGERS & ACQUISITIONS | STRATEGIC ADVISORY

Structuring and Financing a Partner Buyout

A Resource for Middle Market Business Owners

and Their Advisors

Structuring and Financing a Partner Buyout | 2

Buying Out a Business Partner or Shareholder •  When an entrepreneur starts a new business, planning for a buyout of a business partner

years in the future is rarely a top priority- but maybe it should be.

•  As businesses grow and evolve, so too do ownership or shareholder groups. The same partners or investors who took a company from startup to $20 million in revenues aren’t necessarily the right people to grow the company from $20 to $50 million, or $50 to $150 million, and so on.

•  Layer in retirements, partnership disputes and absentee or non-strategic owners receiving generous compensation, and making changes in ownership becomes increasingly more important (and costly) as the business grows.

On the next few pages, we’ll discuss:

1. When a Partner Buyout is a Solution 2. Valuing the Business 3. Structuring a Partner Buyout 4. Financing a Partner Buyout 5. Questions a Business Owner Should Consider When Raising Capital 6. Using an Investment Banker to Raise Capital for the Buyout

Strategic Advisory | Capital Raising | Mergers & Acquisitions


1. When a Partner Buyout is a Solution

Shareholder retirement Provides liquidity for a shareholder who is ready to step away from the business to focus on family, friends or health issues.

Perceived disparity between contribution

and reward

Limits future upside for non-contributing equity partners such as: absentee owners, family members who aren’t involved in the business and non-strategic financial partners.

Partner disputes Allows buying shareholders the opportunity to move beyond competing visions for the company, personal differences or misaligned interests, to focus on the future

Disability or illness of partner Provides liquidity for a partner who is no longer able to run the business

Ownership Structure Cleanup

Removing non-essential minority owners can streamline the process for making major decisions or clear the way for new strategic financial partners.

Shareholder in need of partial or total liquidity

Provides liquidity for retirement, other business ventures, major personal purchases, divorce settlements or other large expenses



2. Valuing the Business

•  If you’ve incorporated a buy-sell agreement into your business’ partnership documents, there may already be a fairly straight-forward formula or process that divides business assets or values the business.

•  If not, the process can become fairly complex and the use of a business valuation expert or investment banker is recommended to help you determine what your company is worth.

To learn more about valuing a business or to discuss the value of your business, please contact Access Capital Partners directly or visit www.accesscappartners.com. 314.783.9550 [email protected]



3. Structuring the Partner Buyout While each situation is unique and there are many ways to structure the buyout of a business partner, here are the most common structures:

Common Partnership Buyout Structures Typically Used When

Pros for Remaining Shareholder(s)

Cons for Remaining Shareholder(s)

§  Seller note only §  Limited options exist for raising external debt or equity

§  Partner doesn’t need total liquidity at once

§  Business can’t afford a large lump-sum cash outflow

+ Avoids taking on external debt or equity

+ Minimizes cash coming out of the company to pay former partner

-  Payments are fixed and often not tied to performance of the company

-  Seller becomes a creditor of the company and receives preference in a liquidation to equity holders

§  Cash payment, plus

§  Seller Note

§  Seller requires some liquidity now, but will agree to take some value over time

§  Business can’t afford a large lump-sum cash outflow

+ Avoids making one large lump sum payment

+ Seller Note reduces the amount of external capital that needs to be raised

-  Requires some cash upfront -  Seller becomes a creditor of

the company and receives preference in a liquidation to equity holders

(continued on next page)



3. Structuring the Partner Buyout (continued) Common Partnership Buyout Structures Typically Used When

Pros for Remaining Shareholder(s)

Cons for Remaining Shareholder(s)


§  Earnout1

§  Seller requires some liquidity now, but will agree to take some value over time

§  Differences in valuation based on expected future performance exist between buyer and seller

+  Avoids making one large lump sum payment

+  Can tie payment of the earnout to future company performance

+  Aligns company and seller’s interests

-  Requires some cash upfront -  Must be prepared to make

contingent earnout payments


§  Seller note, plus §  Earnout1

§  Seller requires some liquidity now, but will agree to take some value over time and some value based on future company performance

§  Differences in valuation exist between buyer and seller

+  Reduces the amount of external capital needed

+  Can tie payment of the earnout to future company performance

+  Aligns buyer and seller interests

-  Requires some cash upfront -  Seller becomes a creditor of

the company and receives preference in a liquidation to equity holders

-  Must be prepared to make contingent earnout payments

§  Lump sum cash payment

§  Severing ties with the selling shareholder is important for personal or operational reasons

§  There is no strategic risk to removing the shareholder in the near term

+  Selling shareholder is removed entirely

+  No future obligation to shareholder for value created after the sale

-  Requires access to largest amount of capital

-  Depending on the situation, large cash outlay can strain the business

1)  An Earnout is a future payment or series of payments made to the former shareholder, usually tied to business performance metrics, such as revenue, EBITDA, customer retention or earnings.



4. Financing the Partner Buyout

Financing options for a partner buyout are based on the profile of the business itself, namely: •  The size of the company (revenue and EBITDA); •  Historic and expected future performance; •  Cash flow profile; •  Asset composition; •  Customer dynamics; and •  Industry segment.


Business Profile

Revenues $5 to $10 million $10 to $30 million $30 to $200 million

EBITDA $0 to $2 million $2 to $7 million $7 to 20+ million

Growth Trajectory Stable to growing Stable to growing Stable to growing

Funding Options

Asset Based Debt Financing

Options

§  Banks §  SBA lenders §  Non-bank, asset based

lenders

§  Many bank and non-bank financing options

§  Many bank and non-bank financing options

Cash Flow Debt Financing Options

§  Limited bank options §  Some SBA lenders §  Some revenue or royalty

financing options

§  Some bank options for senior debt without tangible collateral

§  Many non-bank alternatives for senior term loans, mezzanine loans, unitranche facilities

§  Many bank options for senior loans

§  Abundant non-bank alternatives for senior cash flow loans, 2nd lien loans, mezzanine loans, unitranche facilities

Equity Financing Options

§  Friends and family §  VC funds (industry and

growth profile specific) §  Limited institutional private

equity options

§  Later stage VC firms (industry and growth profile specific)

§  Growth equity investors §  Family offices §  SBICs and traditional private

equity firms

§  Growth equity firms §  Family offices §  SBICs and traditional

private equity firms


4. Financing the Partner Buyout (continued)



4. Financing the Partner Buyout (continued)

•  To discuss a particular financing need, partner buyout or restructuring situation, or just to gather information about the current state of the funding market, including, pricing, structure and availability of middle market debt and equity financing, please contact Access Capital Partners.

•  You do not need an imminent or market ready deal to call us. We strive to be a resource.

314.783.9550 [email protected]



5. Questions a Business Owner Should Think About

•  Capital options for well performing companies have become diverse, more complex and are growing each year

•  The next couple pages cover a range of questions that a business owner should think about related to raising capital for a partner buyout




If Raising Debt •  Is debt available for my company? •  Am I comfortable taking on debt to finance a partner buyout? •  How much debt can my business comfortably support? Is that enough

for the whole buyout? •  How much debt will new lenders provide? •  How much will the debt cost? •  What’s the best way to structure the new debt to minimize cost and

maximize flexibility? •  Who are the best debt providers for a business of my size, in my

industry, in my situation?




If Raising Equity •  Is raising equity a viable funding option? •  Am I comfortable bringing on an equity partner to finance a partner

buyout? •  How much ownership dilution is acceptable? •  What’s my business worth to a new equity investor? •  Am I looking for an active or passive investor? •  What rights or requirements will the new investor have? •  When will this investor require its money back? •  Who are the best equity investors for my business? •  Which investors have invested in companies like mine? •  Does the equity investor add any strategic value beyond capital

(customers, strategic guidance, other partners, etc.)?



6. Using an Investment Banker to Raise Capital

•  Raising capital often inadvertently becomes a second job for many executives, particularly for those who haven’t been through an ownership-change related financing or a financing involving a capital provider other than a bank lender.

•  When time is at a premium, or a business owner wants an expert to manage the process, they can hire an investment banker who specializes in raising capital.



6. Using an Investment Banker to Raise Capital

How Investment Bankers Charge for Their Services

•  Investment bankers focused on raising capital usually work on a contingency basis, charging a percentage of the capital raised, although small retainers may also be charged.

•  The contingent fee or “success” fee is usually paid at closing and funded out of the proceeds of the new capital raise.

•  This fee structure aligns everyone’s interest, so the company is only paying the fee upon a successful capital raise.



6. Using an Investment Banker to Raise Capital How a Good Investment Banker Adds Value for a Business Owner Raising Capital

FEATURE BENEFIT •  Minimizes management distractions, allowing the

executive team to focus on running the business •  More time for management to focus on running the

business and avoid getting distracted

•  Evaluates multiple capital alternatives to help you choose the financing structure that works best for the business and remaining shareholders

•  Ensures capital is structured in a way that minimizes borrowing costs (or dilution) and allows for adequate operating flexibility

•  Positions the company and funding opportunity in a way the is the most compelling to the likely funding sources

•  Results in broader interest from capital providers, often at lower costs and better terms; usually results in a faster close

•  Have access to many, many financing sources that go beyond relationships with local bank lenders

•  Ensures availability of capital when a bank can’t provide enough capital or doesn’t provide enough flexibility

•  Creates a competitive environment for the financing, forcing funding sources to compete and put their best foot forward

•  Forces funding sources to get more aggressive pricing and structure, reducing borrowing costs

•  Solicit multiple financing proposals, including backup financing offers

•  Improves the probability of a successful funding



Save Time. As an executive, the most important resource you have is time. We’re a turnkey solution to help you evaluate every option, then we structure, source, negotiate and help close the deal. We minimize the distraction of raising capital so you can focus on driving your business to the next level. Leverage Our Expertise. We specialize in raising capital for middle market companies and financial sponsors and have access to literally thousands of funding sources across the planet. Whether you're replacing an existing lender, financing an acquisition, buying out a partner or recapitalizing the company, we know which funding sources will provide the best terms, with the most flexibility and be the best fit for the situation. Get the Best Possible Pricing, Terms and Structure. We run a competitive financing process for each of our clients. That process forces funding sources to put their best foot forward and meet critical deadlines. Certainty of Closing. Access Capital Partners is acutely focused on putting its clients in the best position to achieve a successful outcome. With years of experience in raising capital in all types situations and across many industries, we're constantly focused on identifying and preemptively addressing potential obstacles that may make it difficult to raise the capital your company needs, so you can close on schedule.

WORKING WITH ACCESS CAPITAL PARTNERS


$8.0B+ 100+ 35+ 1000+ In total transaction experience

Completed transactions Years of middle market experience

Relationships with capital providers and strategic buyers across the globe

Access Capital Partners is an Investment Bank Focused on Helping Middle Market Business Owners Create and Preserve Wealth By Providing Unmatched Strategy,

Capital, and Merger and Acquisition Advisory Services.

ABOUT ACCESS CAPITAL PARTNERS

Access Capital Partners

7733 Forsyth Blvd., Suite 1168 St. Louis, MO 63105

314.783.9550 www.accesscappartners.com

Securities offered through StillPoint Capital LLC, Member FINRA and SIPC Tampa, FL 33626. StillPoint Capital is not affiliated with Access Capital Partners.

Greg Porto 312.339.2857

[email protected]

Greg Tobben 314.458.8186

[email protected]


Date post:	13-Apr-2017
Category:	Economy & Finance
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Structuring and Financing a Partner Buyout

Economy & Finance