We’re eager to talk to business owners who are passionate about the legacy and growth prospects of their business. Contact Darren Miller, Director, to schedule a confidential intro call or meeting.
Minority vs. Majority Deals
GOALS, CONTROL AND STRUCTURE
Founders and family business owners contemplating a transition or equity investment have many options to consider – not the least of which is the type of transaction that will meet their needs and how it will impact their company going forward.
What do you want to accomplish?
Determining your goals for the transaction will provide the appropriate lens through which to evaluate the possibilities for structuring a deal. Do you have 15 years of steam left in you to stay at the helm? Do you want to retire within the next 5 years? Do you want to make acquisitions or need capital to expand operations? Outlining your plan and identifying what you’ll need to make it a reality are the first action items in determining the type of deal that is right for you, your family, your team and your company.
Are your values aligned?
Regardless of the ultimate ownership structure, it is important to have a mutually agreeable plan for how critical decisions will be made and whose input will be valued in the process. What happens to your input into the company’s operations when you take on an equity investor? The discussion of control is critical in the consideration of a transaction—who’s got it, how much do they have, and how will they use it?
The type of transaction you contemplate will give key indicators as to who might be in control post-closing, but such things are not always black and white based on structure alone. It all comes down to selecting a partner who aligns with your goals, and more importantly, your values.
It all comes down to selecting a partner who aligns with your goals, and more importantly, your values.
WHAT ARE THE OPTIONS?
In a majority investment, the new investor acquires more than 50% of the company. Technically, the shareholder with the majority of ownership interest controls the company’s finances and operations. Traditionally, if a board of directors is established, the majority investor will be awarded more seats/votes than the non-controlling shareholders. That said, the actual operational mechanics of majority investments can vary significantly depending on the intentions of the incumbent owner and the philosophy of the investor.
If you’d like to sell a controlling stake but want to stay at work in the company, you’ll be working alongside (or “for”, in some cases) your investors, for perhaps many years to come. If you’re selling the majority of your equity in order to retire, you’re entrusting your company, your legacy and your team to the new ownership group. You also have the consideration of whether you’d like to retain a minority position of equity ownership to capitalize on future upside or execute a full buyout.
No matter which path you choose, it’s important you have confidence in how the buyer will treat your team, customers and community. Talk with them about their vision for the business, your employees and whether they will sustain or improve your company’s current level of impact on your local economy. Some buyers may value the potential financial savings of the restructuring or relocation of your business without regard to how it will impact the relationships you’ve built with your team and community. If these things are important to you, it’s critical you trust the buyers and have a solid picture of their plan for the future prior to closing the transaction.
No Matter which path you choose, it's important you have confidence in how the buyer will treat your team, customers and community.
When we make an investment, no matter the size or structure, we establish a collaborative vision for the future. Independent of their desired level of involvement beyond the transaction, we work with founders and families to ensure their legacy is preserved beyond the sale of their majority ownership stake in the company. We value the impact of companies on the communities in which they operate. Our team puts in the work to build healthy relationships with the existing management team to ensure they will endure after the deal is closed. Our long-term investment horizon lends itself to sustainable growth strategies vs. the short-term cost-cutting measures a traditional investor might favor.
Minority Equity Buyout: In a minority equity buyout, an owner sells a minority equity position (less than 50%) in the company, typically for the purposes of owner liquidity or buying out other existing investors. This is a great structure for owners who want to continue working in their business for the foreseeable future, but also want to take some chips off the table in the meantime. This structure would provide the incumbent owner(s) with a liquidity event and simultaneously allow the business to continue generating the cashflow required to sustain its own growth. (This is not the ideal structure if your company needs significant investment capital on its balance sheet in order to grow—see more on this below.)
Minority Growth Equity: Traditionally, a minority growth equity investment would place all (or most of) the invested capital onto the company’s balance sheet. This new capital would allow the company to grow—either through operational expansion, acquisitions, or both. (This would typically not be a great structure for an owner who wants a meaningful liquidity event upon closing, although growth equity investments can be structured to accommodate both goals.)
Minority growth investors need to have a very clear idea of how their money is going to be put to work in order to ensure their investment makes sense. It is in your best interest to thoroughly develop the growth strategy you wish to pursue and have a full understanding of the financial and human resources you will need to accomplish your goals. Then, based on the valuation of your company, you can determine how much equity you need to sell in order to gain the capital you need.
Finding a partner that aligns with your vision and values is also critical with a minority investment. Talk with them about their expectations of involvement, what resources they can bring to the table beyond capital, how they approach challenges, their desired investment horizon and their ultimate intentions for exiting their position in the business. It may seem like an obvious thing to avoid, but some owners can get distracted by a high valuation and find themselves in business with a partner who doesn’t care about the same things they care about. They end up with additional cash and additional stress. A properly aligned partnership will allow everyone involved to feel confident in their decision and set you and your business up for success.
A properly aligned partnership will allow everyone involved to feel confident in their decision and set you and your business up for success.
Unlike traditional private equity investors, we have the flexibility and appetite for a wide range of minority investment structures. When we invest alongside a founder or family owner, our number one priority is values alignment. We believe that is the best place to start to ensure our future endeavors will be successful. In the course of operating a business over several years, there will be different ways to approach challenges and opportunities. We know that when our values are aligned, those decisions become more clear and far less turbulent. You’ll rarely see a formal “board vote” in any of our partnerships, because we know that when we’re all looking at the same data with the same values, we come to a mutually agreeable decision.
Multi-faceted Deal Structures:
With a flexible investor (like Georgia Oak), equity investments can be structured to allow for multiple boxes to be checked at once. You could feasibly buy out other existing investors, capitalize your management team to become equity owners, achieve some liquidity for yourself, add additional capital to the balance sheet, gain operational expertise to aid in growth and retain a portion of equity to capitalize in future upside. In fact, our investments often do several of these things at once.