Friday, July 30, 2010
Thursday, July 29, 2010
Characteristics of the Lower Middle Market
Owner has unlimited liability and personally guarantees debt.
The company employs functional managers.
Company has evolved from bookkeeper to controller or CFO.
Owner typically has more than 80% of personal wealth tied to business.
Owner plans to use the transfer of the business as the main wealth-creation vehicle.
About 70% of the businesses will not transfer to the next generation.
The company has uncertain access to capital.
Owner strongly prefers to manage without equity partners.
Enterprise value of the company can vary widely from year to year.
(good stuff from the Slee book on Private Capital Markets)
The company employs functional managers.
Company has evolved from bookkeeper to controller or CFO.
Owner typically has more than 80% of personal wealth tied to business.
Owner plans to use the transfer of the business as the main wealth-creation vehicle.
About 70% of the businesses will not transfer to the next generation.
The company has uncertain access to capital.
Owner strongly prefers to manage without equity partners.
Enterprise value of the company can vary widely from year to year.
(good stuff from the Slee book on Private Capital Markets)
Requiring Founders or Key employees' stock to vest in a term sheet might not be a good move.
Equity investors (PEGs) might sometimes require that all or a portion of the stock owned by Founders and Key employees vest only in stages after continued employment with the company. From the employee standpoint, this is especially sticky. A capricious Founder might "86" a key employee before they are vested.
If you're on the receiving end of that kind of deal, it pushes the importance of an employment contract way up.
As an investor or Founder, you can't have that rattling around in the back of the head of a truly "key" employee. Early stage ventures are difficult. Private ventures are difficult...period. You need full commitment, without reservation, of the people that are working with you to build your venture. They can't be wondering if they're going to get cut before they get to realize the fruit of their labors.
If you're on the receiving end of that kind of deal, it pushes the importance of an employment contract way up.
As an investor or Founder, you can't have that rattling around in the back of the head of a truly "key" employee. Early stage ventures are difficult. Private ventures are difficult...period. You need full commitment, without reservation, of the people that are working with you to build your venture. They can't be wondering if they're going to get cut before they get to realize the fruit of their labors.
How a Private Equity Group might be involved with your company after the investment...
In a relationship that is very different than that you may have with a bank, a private equity group, or private capital investor will contribute sometimes as an advisor and sometimes more directly to the growth and health of your venture.
There are several ways that you might anticipate their involvement:
Helping you to develop a strategic business plan,
Help you to organize and recruit a management team, board of directors, and professional service providers,
Help you to determine appropriate capital structures, arrange and negotiate equity and debt financings, and provide financial advice,
Help to develop strategic partnerships,
Help you to plan and execute appropriate exit strategies,
Help you to identify and evaluate potential acquisition opportunities.
There are several ways that you might anticipate their involvement:
Helping you to develop a strategic business plan,
Help you to organize and recruit a management team, board of directors, and professional service providers,
Help you to determine appropriate capital structures, arrange and negotiate equity and debt financings, and provide financial advice,
Help to develop strategic partnerships,
Help you to plan and execute appropriate exit strategies,
Help you to identify and evaluate potential acquisition opportunities.
Capital Access Points Listed in order of Expected Returns (increasing)
Industrial Revenue Bonds
SBA 504 Loan
Business & Industry Loan
Tier 1 asset-based loan
SBA 7(a) Loan
Bank equipment leasing
Captive/vendor equipment leasing
SBA CAPline credit line
Bank credit line
Tier 2 asset-based loan
SBA export working capital program
Specialty equipment leasing
Tier 3 asset-based loan
Venture capital leasing
Debt Mezzanine capital
Equity mezzanine capital
Private equity group
Large-volume factoring
Venture capital
Angel investing
Medium-volume factoring
Small-volume factoring
SBA 504 Loan
Business & Industry Loan
Tier 1 asset-based loan
SBA 7(a) Loan
Bank equipment leasing
Captive/vendor equipment leasing
SBA CAPline credit line
Bank credit line
Tier 2 asset-based loan
SBA export working capital program
Specialty equipment leasing
Tier 3 asset-based loan
Venture capital leasing
Debt Mezzanine capital
Equity mezzanine capital
Private equity group
Large-volume factoring
Venture capital
Angel investing
Medium-volume factoring
Small-volume factoring
Actions that Increase Economic Value in Private Ventures
If your goal is to increase recast EBITDA, there are several value drivers: Increase sales, Lower the cost of goods sold, and control operating expenses.
You can also increase economic value by reducing the risk in a venture. This can be done by reducing business risk, reducing the cost of capital, reducing customer concentration, or broadening the management structure.
Finally, employing additional high yielding capital is a way to increase economic value. This can be done by Improving investment decisions, or by decreasing the capital base...withdrawing or liquidating underperforming businesses or lines.
("Private Capital Markets, Valuation, Capitalization and Transfer of Private Business Interests", Robert T. Slee, John Wiley & Sons)
You can also increase economic value by reducing the risk in a venture. This can be done by reducing business risk, reducing the cost of capital, reducing customer concentration, or broadening the management structure.
Finally, employing additional high yielding capital is a way to increase economic value. This can be done by Improving investment decisions, or by decreasing the capital base...withdrawing or liquidating underperforming businesses or lines.
("Private Capital Markets, Valuation, Capitalization and Transfer of Private Business Interests", Robert T. Slee, John Wiley & Sons)
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