Accordingly, family business owners frequently may not be able to achieve all of their conflicting objectives and are 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. 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 forces family members to react.
While it may appear that the former alternatives are the only viable approaches for providing liquidity for the retiring family members, 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.2
This type of transaction involves backing certain members of family management in buying ownership from the senior generation or from outside shareholders. Active family operators secure operating control and significant equity ownership, while bringing in an outside institutional financial partner for growth, management assistance and related support. The selling shareholders achieve liquidity to meet personal retirement, estate planning and diversification objectives. This type of transaction also ensures 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.
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 business. 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-to-day 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 is a proven method for easing the way for a seamless family 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!
About the author:
Richard A. Vinci is Managing Director of Newbury Piret & Company
(www.newburypiret.com), one of New England’s leading investment banking firms. As a full service NASD licensed broker dealer, Newbury Piret provides Mergers and Acquisitions, Equity and Debt Financing, and Financial Advisory Services to middle market, family and closely held businesses throughout North America and Europe.
(1) Ward, John, Keeping the Family Business Healthy: How to Plan for Continued Growth, Profitability and Family leadership, San Francisco, Jossey Bass
(2) Collard, John, Value Creation Model: Build Enterprises Future Buyers Want To Invest In, Buyouts., Oct 4, 2004