For a privately held business, a sale of the firm to senior management and/or a private equity group is often preferred to a sale to a strategic buyer because it allows for the continuity of the business in a substantially unaltered form, while simultaneously providing liquidity for the current shareholders. Called management buyouts (“MBO’s”) or leveraged buyouts (“LBO’s”), these types of transactions offer a degree of flexibility to owners/shareholders that simply isn’t available in strategic deals. Owners can sell 100% of their equity, retain partial ownership by partnering with a private equity group, or sometimes just take some cash “off the table” without giving up any ownership in the business at all.
In sale of the business, a private equity partner can provide value-added services to the new portfolio company, including access to industry expertise, a disciplined board of directors, and capital to grow or fund “add-on” acquisitions. An MBO or LBO backed by private equity also can offer the selling owners with an opportunity to reward loyal managers who have helped build the company into a successful enterprise. Assuming these managers are not ready to retire after the closing, the deal can be structured to give them an equity stake in the business going forward. Most private equity sponsors enthusiastically support such incentives for continuing management, either through an opportunity to co-invest or performance-based options. The selling shareholders also may be able to “roll” some of their proceeds in a sale, so they can participate in the future success of the company.
By contrast, a recapitalization provides an opportunity for business owners to realize liquidity while maintaining a controlling or partial interest in the company. Their motivation may be to partially "cash out" for estate planning or other private reasons or, alternatively, to restructure the balance sheet to provide capital in order to achieve greater operational flexibility or take advantage of quickly changing markets or technologies.
What all such transactions have in common is that they usually involve substantial amounts of debt financing. The process can be more complicated than a "straight-up" acquisition due to the participation of multiple parties. The due diligence process will be thorough and occasionally protracted, as the principals and their attorneys, private equity groups, commercial lenders, and various third-party consultants will all have their own priorities. The coordination of all participants is essential to a timely and successful closing.
Whatever the situation, Grace Matthews works with owners and shareholders on a strategy that best meets their needs. If the goal is to generate liquidity, we work to develop a thorough understanding of the risk profile and cash flows of the business, advise the owners on the best potential buyers or equity partners for the business, and then negotiate the best terms relating to valuation, management continuity, environmental issues, and other aspects of business. If new debt financing or restructuring is needed to support growth or for other reasons, we have the contacts and resources to ensure that our client receives the best pricing and terms.
With our extensive network encompassing within the private equity, leveraged finance, and legal communities, Grace Matthews has the knowledge and experience to guide all the parties towards an optimal outcome.
Within the private equity universe, family offices are a unique subset. They are the investment vehicle for extremely wealthy families (or groups of families) that are looking to invest in solid, stable private businesses. Family offices tend to be more patient, and hold businesses for longer times than traditional private equity, since they are investing for their own account versus traditional private equity fund managers, who get the bulk of their compensation from capital gains when they sell one of their portfolio companies.
To some Grace Matthews clients, a family office investment or acquisition makes sense because they are generally open to the selling shareholders retaining some minority ownership in the business. This is often is a nice way to diversify assets in the sale of a family business, while staying connected in a small way. Family Offices also typically retain most or all employees, and like private equity funds, they typically provide options or some type of equity participation for management.