DISCOVER THE BENEFITS OF A TAILORED RECAPITALIZATION: For most family and closely controlled business owners, ensuring the continuity and success of the enterprise is a top priority.

In the article below, “Seamless Succession Planning: The Benefits of a Tailored Recapitalization,” Richard Vinci, Senior Managing Director, First National Investment Banking (Omaha), makes a compelling case for utilizing a customized equity recap tailored to meet the specific needs of a family or closely controlled business.

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We have executed dozens of transactions in a range of market segments, but the same fundamentals apply across all of them. Our on-going transaction process provides us with up-to-the-minute market knowledge in these sectors that may be of corporate development interest to you.

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Seamless Succession Planning
The Benefits of a Tailored Recapitalization

By Richard Vinci, Senior Managing Director,
First National Investment Banking, Omaha

Family and closely controlled businesses account for over 80 percent of all businesses in the United States. Many of these business owners have the admirable goal of passing the business on to their family members or valued employees. In reality, only 30 percent survive into the second generation and only 11 percent survive into the third generation, with only 3 percent of all businesses continuing through the fourth generation.¹ These grim statistics have much to do with poor succession planning which is exacerbated by the lack of viable liquidity options for retiring owners.²

Since ensuring the continuity and success of the enterprise is a top priority for most family and closely controlled business owners, these owners will be compelled to address some daunting and potentially unpleasant issues including, but not limited to, succession, control, tax planning, capital procurement for growth, and emotions surrounding the succession of the business. 

A common theme for family and private company business succession centers on the founder(‘s) retirement and his/her children and/ or trusted non-family management seeking to succeed the founder(s) in the business. Traditionally, owners seeking to retire will require a liquidity event to monetize the value creation they have worked so long and hard to attain.

A retiring owner knows that it may be difficult to keep the company going and provide for the transfer of ownership to the next generation by selling the business, but they are still faced with needing the liquidity to provide for their retirement. In many cases, the heirs and/or management team are already employed in the business and are being groomed for executive positions, but have limited liquid financial resources to buy out the owners. 

Accordingly, these business owners may be forced into a total sale of the business or a transfer of ownership to the next generation without providing the requisite liquidity. As a result, the business may be disrupted; stability may be compromised; and capital may be insufficient for the company to grow and sustain its competitive advantage. 

Conventional wisdom for creating liquidity tends to view the owner’s options as limited to taking the company public, establishing an ESOP, selling to a strategic or financial firm, or a debt recapitalization. These strategies all have drawbacks such as loss of control, increased regulation, and no new capital being raised. The end result is frequently unsatisfactory and may lead to the company doing nothing or forestalling its succession strategy until a catastrophic event, such as a severe illness or death of the owner, forces family members and/or management to react. 

While it may appear that the former alternatives are the only viable approaches for providing liquidity for the retiring owners, an often neglected strategy is a customized equity recapitalization tailored to address the specific liquidity, growth and control requirements of the family and owner-managed business.³

This type of transaction involves backing certain members of the family or the management team in buying ownership from the senior generation or from outside shareholders. Active operators secure operating control and significant equity ownership, while bringing in an outside institutional financial partner for growth, management assistance and related support.

Example of a Customized Equity Recapitalization

$60mm Valuation Price Senior Debt $30mm 3.0x EBITDA 50% of Loan to Value Private Equity $10mm Preferred 17% economic ownership in case management projections not met Private Equity $10mm Common 50.0% economic ownership 49.9% voting interest Family Management $10mm Common 50.0% economic ownership 50.1% voting interest Recapitalization Structure Benefits to Family and Closely Controlled Business Owner Liquidity to diversify holdings and provider for retiring owner Conservative capital structure to support growth Corporate structure to retain operating control Meaningful reinvestments to provide "second opportunity for liquidity event" with up to 50% economic ownership Proven private equity thought partner to grow the business (e.g. strategy, organizational development, acquisition expertise)

The selling shareholders achieve liquidity to meet personal retirement, estate planning and diversification objectives. This type of transaction also insures that the family business stays in the family and maintains its continuity. Further, this approach can be executed in a very discreet and confidential manner. See the above example of a customized equity recapitalization and its benefits to the family and closely controlled business owner.⁴

The funding for this type of recapitalization is traditionally provided by private equity firms with committed institutional capital focused on investing in family-controlled and owner-managed businesses. The managers/partners of these funds typically have significant experience in working with family business and have a special understanding of the unique issues facing family and closely held businesses.

The objective of these funds is to work as a value-added partner in developing a strategic plan with appropriate incentives that align the interests of shareholders to create incremental equity value. The day-today operations of the business are left with family/owner managers. 

In summary, a customized equity recap tailored to meet the specific needs of the family business and closely controlled business is a proven method for easing the way for a seamless succession plan. An equity recap can provide the much needed liquidity to execute the plan’s strategy and help to insure that the family business is kept in the family or with the key members of the management team.

Sources:

1. Family Firm Institute.

2. Ward, John, Keeping the Family Business Healthy: How to Plan for Continued Growth, Profitability and Family Leadership, San Francisco; Jossey Bass

3. Collard, John, Value Creation Model: Build Enterprises Future Buyers Want To Invest In, Buyouts., Oct. 4, 2004

4. Parker, Brook T., Equity Investment Overview, Lineage Capital, Boston, MA, 2004

Richard Vinci, Senior Managing Director, First National Investment Banking, Omaha, can be reached at (402) 633-3372 or rvinci@fnni.com.
Reprinted with permission from the First Quarter 2008 Quarterly Market Map: A Quarterly Newsletter from First National Investment Banking.

Bob Wagner Joins FOCUS as Managing Director in Los Angeles

Expands Firm’s Manufacturing M&A Capabilities

Robert A. Wagner has joined FOCUS’ Los Angeles office as a Managing Director. “With more than 30 years of international M&A experience on both the corporate and service side, Bob will be a tremendous asset to the West Coast team,” said Paul Richey, Managing Director of FOCUS’ Southwestern region. “Bob’s extensive experience in corporate development, strategic planning and mergers & acquisitions, particularly in the manufacturing sector, will be a wonderful addition to the firm.”

About Bob Wagner

Wagner joins FOCUS from Janas Associates, a boutique investment banking firm in Pasadena, CA where he was most recently a Managing Director. He also founded Wagner & Associates, LLC, a corporate development advisory firm. Prior to Wagner & Associates, he served as Senior Vice President of Mergers & Acquisitions at Leggett & Platt. Read more...

FOCUS Managing Director G. William Bavin Co-Authors New Study for Department of Education

The U.S. Department of Education recently released the “IMPLEMENTATION STUDY OF THE CREDIT ENHANCEMENT FOR CHARTER SCHOOLS FACILITIES PROGRAM,” co-authored by G. William Bavin, a FOCUS Managing Director and the firm’s Education Banking Team Leader. The research study was led by Ken Temkin, PhD, of Maryland-based Optimal Solutions Group, a public policy research firm. 

Many charter schools face a critical problem: lack of suitable school facilities and the inability to obtain financing to secure appropriate facilities. To address this problem, the U.S. Department of Education established the Credit Enhancement for Charter School Facilities Program in 2001. The study examines the implementation of the program during the early years of its existence and documents loan activities facilitated by the program.

According to Bill Bavin, “Our study found compelling support for the effectiveness of the Credit Enhancement program, even in the early years of its implementation.” Many participants praise the program for providing capital market access to school borrowers that might not normally have been able to access these resources.