Owners who seek funding to cushion themselves and their
executive team against a downturn, or to simply cash out, are usually sent to
the back of the queue, Kelleher says. He looks for owners who seem hungry or
highly motivated, and who express an urgency—and a plan—to aggressively grow.
"Frankly, on balance, the guy who has $250,000 in the bank, versus the guy who
has $250 million in the bank, might actually stay up a little bit later at
night," Kelleher says, though he concedes that some owners will drive at full
speed—no matter how much they are worth.
TOP VIEW
Business owners who need capital injections, but do not want to give up control of
their firms, can seek minority partnerships. Frequently flowing from boutique
private equity firms, minority-stake investments can offer entrepreneurs not
only the funds they need to expand an established business, but also the
expertise and strategic direction necessary to take a company to the next level. However, business owners who choose this path
for growth should never assume that they are taking on a silent
partner. |
Because of the plenitude of private equity money in the market,
Marriott explains, the game has shifted to the point where target companies
approached by private equity firms seeking a majority interest can bend the
rules and respond with an offer for a minority stake. If an investor balks, an
owner can hire an investment bank to solicit more offers—or at least threaten
to—to show how serious he is about floating a minority interest. "Even if you
really like a group and you want to try to figure out a deal with them, I think
you’re still better-served by having the threat of a book there that you’re
going to take to market," Marriott maintains. "If you are operating one-on-one
with this group, you don’t have any leverage to negotiate."
While capital fuels expansion, many target companies also seek
minority partners to help drive a business carefully toward greater success.
Tognoni calls this strategy of seeking investors to offer expertise and
strategic direction, as well as money, "turbocharging your equity." Tom
Severson, Nicklaus’ CFO, sought out New York Private Bank & Trust for just
such assistance. "Howard Milstein and his team have a proven track record of
building successful businesses. And during the process of looking for an
investor, it became clear to us that he and his team are extremely intelligent
and creative, and that they would bring much more to the partnership than simply
a financial investment. We were looking for a partner that could help us realize
the full value of our branded businesses, and also help institutionalize our
business so that it continues to grow and prosper well beyond Mr. Nicklaus’
lifetime."
David Kalt, CEO of optionsXpress, an options trading company
based in Chicago, completed a minority private equity infusion of some $90
million with Summit Partners in early 2004—largely so he and the other original
investors could cash out some of their equity. But he also was looking toward
floating a public offering, partly because the higher degree of scrutiny placed
on a public company would offer greater peace of mind to his customers in
options trading. Summit Partners’ track record impressed Kalt. "At the time of
the investment, we had more than 250 portfolio companies, approximately 100 of
which had completed IPOs and 80 of which had completed strategic M&As," says
Summit’s Susan E. Barr. Kalt adds: "Most of them were minority interest,
entrepreneurs who had taken money off the table."
Similarly, when Tognoni brought in Thoma Cressey Bravo, he
wanted not only the firm’s capital, but also its extensive M&A expertise.
Consona has acquired nine companies since closing the deal. "Rather than go out
and try to find the guy who would pay us the most, we were more interested in
finding the guy with the best partner [skills and experiences]," says Tognoni,
who believes he could have squeezed 5 to 10 percent more from another investor.
"We were just not going to try to optimize the last percent out of it. We were
more interested in just finding the right partner."
Minority investment does not suit all companies. Before approaching the private
equity market, experts suggest that entrepreneurs consider the characteristics
that most commonly appeal to these investors:
• Focus on a growth sector and have a proven track record for
capitalizing on it. Most minority investors avoid slow-growth opportunities and
companies in turnaround mode.
• Boast management teams filled with highly qualified
executives who have worked together for an extended period. But the team cannot
be so experienced that they might consider retirement anytime soon, at least not
until they move the company to its next level.
• Have a detailed business plan outlining how to continue to expand the
business—even down to a granular level, such as how many outlets a retail
business plans to open within 12 months.
|
