— Original publication date: September 19, 2016
Our post regarding the “Two Bites of the Apple” concept for business owners/CEOs received some wonderful comments! Some of these comments included some good questions. Therefore, we thought we would put together a numerical example submitted by one of our very talented financial friends.
STAGE 1:
Let’s say your company is valued at $15 million. You as the owner/CEO need investment capital to fund your growth strategies, and you would like a partial exit by selling, for example, 67% of your company to an outside private equity investor for $10 million. That is BITE 1.
Think about it… your family now retains 33% of the equity in the company you’re building, but the private equity investor has now allowed you to diversify your personal wealth, and has brought valuable working capital to the business to fund your further growth opportunities.
When selecting a private equity partner, make sure you’re not getting “just money.” Make sure the private equity firm has significant experience in your particular vertical. For example, if you’re in the restaurant business make sure the private equity firm brings experience in the restaurant business.
A good private equity firm with experience will come alongside at the board level to help your management team:
- Increase efficiencies
- Look at valuable mergers and acquisitions
- Bring detailed financial analysis
- Coaching of management
- Strategic relationships or joint ventures
Over a 5‑year period your company–plus the private equity firm investor–develop and implement this strategic plan based on the above private equity firm’s expertise, which includes components for organic growth (growing your current market share), and organic growth (acquiring other companies), plus financial analysis to help guide the overall process to achieve significant growth objectives.
STAGE 2:
After executing the overall growth plan with your private equity partner, it’s now time to think about a full exit for your family through the sale to a third party. The company is now valued at $70 million, and your company/family is realizing the upside of the recapitalization through your remaining equity stake, totaling $23 million. ($70M times 33%). Voila! BITE 2!
Private equity executives usually do not make their money until the exit. Therefore, you will have a partner who is focused on driving value creation in 3 to 5 years after they make the co‑investment with your company. You can focus on continuing to build up the growth strategy while they begin looking for buyers. They’re experts in running a process to get maximum shareholder value for your company.
If you are involved in any way with a company that would like to talk about the above strategy, please contact me. By the way, we’ve known business owners that have gotten much more than two bites of the apple through a similar strategy.
Contact me any time if you want to chat. 760-801-5021 | mkc@mclifford.com
