PRIVATE INVESTMENT FIRMS

PRIVATE INVESTMENT FIRMS Executive Summary Private Investment Firms are vehicles that an owner can use to sell all or a part of his business and thereby giving him a sizable liquidity event, continued control, a continuing equity state (may be majority or minority), as well as additional intellectual and managerial resources. These are also powerful vehicles to enable a management buyout or divestiture. Private Investment Firms are quite different than Venture Capital Groups, which are focused primarily on start-up companies. Private Investment Firms look for profitable and growing companies in which to invest their monies. There are, however, Firms that will invest in turnarounds and bankruptcies. Private Investment Firms serve the owners in helping them grow the company at a safer and faster rate than they could have done on their own. Typically a transaction with a Private Investment Firm takes the form of a recapitalization. This means in effect that the owner (i) cashes out now for the full value of his company; (ii) continues to own a significant equity interest in a growing and more profitable company; (iii) maintains operating control; (iv) possibly provide key management with equity on terms they can afford; and cashes out again in 3 – 7 years, with the second cash out often worth more than the initial cash out. What is a Private Investment Firm? Private Investment Firms (sometimes referred to as private equity groups, investment groups or financial buyers) are investment vehicles funded by corporations, pension funds, institutions and wealthy individuals. Most invest in mid-market companies and in owners and present management. The Private Investment Firm provides financial and management resources to help the company grow, become more competitive and profitable. Their objective is to create an environment in which the current owners and management team, along with the Private Investment Firm, reap financial and personal rewards through the ownership of a growing mid-market company. At some point, typically three to seven years after the investment, the Private Investment Firm will exit the company. How does a Private Investment Firm differ from a Venture Capital Group? There are some differences between the two. Private Investment Firms differ from Venture Capital Groups in that they only invest in mature companies that have demonstrated profitability. Some Private Investment Firms, however, do specialize in turnarounds and distressed companies. Venture Capital also generally looks for a larger portion of the pie, such as 80% or more of the equity and on terms that a mature profitable company would not find acceptable. It’s all a matter of risk allocation. Some of the larger Private Investment Firms also have affiliations with Venture Capital Groups. If you are a mature mid-market company you should only be dealing with Private Investment Firms. Private Investment Firms invest in three things: management, management and management. When should a Company Consider Partnering with a Private Investment Firm? 1. The Company needs Growth Equity: The fact is that failure to grow means shrinking profitability, stronger competition and frustrated and complacent employees. Consequently, companies must grow, increase their market share and perhaps diversify. Business opportunities which are turned down or ones that the company is unable to pursue will be picked up by its competitors or larger corporations that are gaining entry into the company’s industry. The owner, however, may not have the cash or may have reached a certain stage in life where he no longer wishes to risk his own capital. Private Investment Firms enable the company to grow and become more formidable competitors without the owner putting his own earnings and personal assets at risk. 2. Too much of the Owner’s personal assets are tied up in the Company: A Company owner needs to consider a transaction with a Private Investment Firm if a significant part of his net worth is tied up in his business. In the event of a downturn in his business or the economy in general, a lifetime of work could be shattered for the owner and his family who has not diversified his assets outside the business. The Private Investment Firm solves this problem by cashing out the owner while he still retains a significant equit y in the Company. The owner sells his cake and eats it too. This is often accomplished using an owner’s recapitalization. See the next paragraph. 3. The Owner wishes to take advantage of an Owners Recapitalization: The owner would like the opportunity to: (i) cash out now for the full value of the company; (ii) continue to own a significant equity interest in a growing and more profitable company; (iii) maintain operating control; (iv) possibly provide key management with equity and (v) cash out again 3-7 years from now. 4. It’s time for the Business to be transferred to the Family’s next Generation: The owner would like to transfer ownership and management of the company to succeeding generations within the compelling framework of discretion and confidentiality. The owner would like a significant liquidity event and ensure that the family business stays in the family and maintains its identity with the community. The proper Private Investment Firm will enable the family to meet important financial objectives for all members, keep the family business in the family, avoid family conflict and provide capital for future growth. 5. Incumbent Managers wish to purchase the Company: Many times management will have the opportunity to buy a company which they have been operating, but will not have the cash resources to complete the purchase. Private Investment Firms partner with incumbent managers to acquire companies which they run, but do not own. The Private Investment Firm brings financial credibility to management’ s ability to complete a buyout. Managers receive a generous equity stake in the conservatively capitalized company while retaining daily operating control. Additionally, managers gain the Private Investment Firm as a well funded, knowledgeable partner to help them grow the business. 6. Inactive Owners wish to Sell: The inactive owners of a company wish to exit the business and obtain cash for their investment. The Private Investment Firm will enable the inactives to cash out completely for the full value of their company while at the same time provide the continuing owner with a partial liquidity event and the Private Investment Firm as an ongoing partner. 7. The Owner plans to Retire in 3 – 7 years: The owner thinks that in 3-7 years there is a very distinct possibility that he would like to retire or move on to other things. The investment horizon for many Private Investment Firms is three to seven years. This will provide the perfect opportunity for a planned and non disruptive transition of ownership. 8. The Owner is Considering an Outright Sale: Many Investment Firms will have a number of companies in their portfolio. These will include companies that are considered platforms for acquisitions of other companies in the same or related industries. Platform companies will acquire others and have no requirement of continuing management other than on a transitional basis. 9. The Company is financially Distressed: There are Private Investment Firms that specialized in investing in troubled or distressed situations, even when a company has already filed for bankruptcy protection under Chapter 11. These Firms have long term relationships with lenders, mezzanine funds and private investor to enable them to fashion financing structures that both preserve the business and return it to a growth posture. Often they will work with existing owners who wish to retain a minority investment in their company. 10. The Parent Company wishes to Divest an orphan division: This is the perfect opportunity for a transaction with a Private Investment Firm, particularly for divisions with strong management. Corporations selling divisions require that a buyer have both ample funding and a track record of closing transactions quickly and efficiently. The selling company would receive full cash value for the division while management would continue to operate the business and obtain a significant equity position in the divested operations. Instead of just selling off a division to the competition, consider talking to some Private Investment Firms. They will be able to work with you in ways that your competitor buyers are not. A Typical Transaction           The Private Investment Firm buys 100% of the company Must grow -- that’s how they profit Generally need owners or key management to continue Owners buy into 10-40% equity, sometimes more, generally at a discount Owners get additional equity incentives Management selected by owner is able to participate in equity of the company Private Investment Firm brings o capital resources o skills and knowledge company now lacks o support at board level Owner/management bring o operating knowledge and skill o provide strategic direction with Private Investment Firm Company grows exponentially, both internally and through acquisitions Three to seven years later the owners and management can cash out again through (i) a public offering; (ii) an outright sale of the company; or (iii) another recapitalization. The second cash out is typically higher than the first. An Example Assumptions:   Company is worth $30 million Owners retain one third of the Company’s stock going forward How the transaction is structured: Owners receive $30 million cash  Source of funds: o $15 million debt o $10 million Private Investment Firm equity o $5 million paid back into business as equity investment by owner Result:        Owner has $25 million cash plus one third of the Company Key management receives equity stake as well Company now has resources never before available to it. Owner shares the ongoing operating and financial risk with an experienced, value-added partner Company is able to dramatically increase its financial stability The Company grows exponentially, internally and/or through acquisitions, and five years later the owners cash out again for 33% of the value of the Company Second cash out generally higher than the first. Immediate Advantages of Private Investment Firm Transaction            Substantial current cash payment from the partial sale of the business A deal structured to fit your needs You continue to run your company Immediate diversification into cash and protection against economic downturn (a general recession or a slowdown in the industry or the business) Family discord prevented Continued operating control Company grows using someone else’s money Additional skills, expertise and contacts makes company stronger, more aggressive and competitive Seasoned guidance in strategic planning and long-term direction Facilitation and more alternatives with respect to estate considerations Ability to draw upon significant mergers and acquisitions experience and resources    Continued significant equity ownership in the business for future appreciation Key management has opportunity to participate in growth of company A second cash out 3-7 years later How a Private Investment Firm helps you Grow                      Access to new markets, including overseas Strong industry knowledge Strategic alliances within the industry Invest in new product development and expansion Prove undeveloped business models Easier access to capital Stay abreast of new technologies Expertise to help you grow through acquisitions Complement strategic planning and aid in developing the long term vision of company Additional marketing acumen Advanced administrative and control systems Identify existing and future organizational needs. Sophisticated legal and financial counsel Global organizations. Many Private Investment Firms have professionals offshore who are native and located in the most attractive markets in the world. They assist in setting up new businesses, in making international acquisitions, as well as in establishing joint ventures. Help when you need it in the form of requested objective advice Cross selling to other Private Investment Firm companies operating in complementary industries Position the company to attract strong interest at exit Strengthen management team if needed Build Board of Directors with high level professionals Monitor, upgrade IT systems as needed Monitor and facilitate strong banking relationships Private Investments Firms will not run your business. More than likely they will be headquartered halfway across the country. So if you don’t plan on staying to run the Company, have a good management team in place. Value Added Services Although each Private Investment Firm is unique, specific areas of support provided by the Private Investment Firms include:                Financing and lender relations Legal counsel Strategic planning process Identifying acquisition candidates and implementing acquisition programs Capital expenditure planning Labor relations Risk management Tax planning and compliance Budgeting Internal controls and reporting Management oversight Executive search and recruiting Technology Formulating business strategies Developing marketing and product plans   Providing introductions and enhanced credibility with suppliers, customers and financial institutions Planning administrative strategies, including tax, insurance and compensation programs Corporate Strength and Entrepreneurial Independence   The key to a successful and enduring partnership is trust. The Private Investment Firms know that the last thing an owner wants is a partner who meddles in day-to-day operations and attempts to fix things that are clearly not broken The partnership needs to be structured to meet the needs of the owners. Private Investment Firms want company founders and managers to retain large equity stakes. Control is not that important to many Private Investment Firms. All major decisions made by partners should be through general consensus. The Private Investment Firms have no aspirations to run the companies in which they invest. That job belongs to management. Private Investment Firms think they can add most value by providing advice when it is needed, offering strategic suggestions and financial expertise and providing new contacts as required. Component companies draw upon the important resources consolidation offers. Yet they continue to be operated autonomously by their own management. Remember, the Private Investment Firm invests in you! The company can best be operated independently if there is that special relationship between the company and the Private Investment Firm. Turnarounds : The right Private Investment Firm can mean the difference between liquidation and success!   Seamless Transactions On many occasions the ideal transition is one where no outside the company notices the change in ownership. The identity of the business remains the same and the personnel and facilities are unchanged. Within companies, every effort is made to retain each company’s historical financial reporting systems and ways of conducting business. Quick Closing Most Private Investment Firms have the resources to close quickly. Transaction Structuring The Private Investment Firm manages the negotiation process to ensure that the buyout is properly organized and structured from the outset. They are structured with the appropriate amounts of senior debt, subordinated debt and equity, with a diligent review by the bank lenders. The prices paid are based on historical results and a judgment of future earning power. There is a high sensitivity to financially sound risk/reward considerations. Values Private Investment Firms consider Crucial       Quality of management and its chemistry with the Private Investment Firm. Candor. Absolute integrity. Take-charge management. The best decisions are made close to the customer. Decision-making should be decentralized to foster entrepreneurial behavior. Alignment of strategies and values. A commitment to deliver by both the Private Investment Firm and management. Companies that have partnered with investment groups: 1 (800) Flowers.com Wild Oats Markets Seagate Technology Mergent Inc. Kyriba Michael Foods Duracell Brooks Equipment Gold’s Gym Dealer Tire ChemDesign TiVo Ticketmaster Lexicon Marketing Indian Motorcycle Vans, Inc. InSight Health Services Gart Sports PETCO Rand McNally Twinlab Viasys Qwest Macromedia, Inc. Twinlab C L Holdings, Inc. NetZero The Golf Channel Cisco Systems Appleseed’s AccentCare Chung’s Foods Sportcraft Marshall Retail Group Samuel Lawrence Furniture Windward Petroleum E Style Acentic Meineke Car Care Flat Rock Grille Natural Sciences Industries Herbalife Johnstown Corporation Imagine Technologies CompUSA Celetron Captus Network Orius Hilsinger Company Cecilware Claire-Sprayway Employers Direct Windsor Industries Denny’s Inc. EnduraCare Extend America Converse, Inc. International Surface Preparation West American Rubber Co. Boston Common Press Iron Mountain Sterling Foods Kinko’s Freed’s Bakery Sylvan Learning Accessline Communications Arula Systems Comstellar Global Streams Stereotaxis Freight Pro Renal Solutions Trades Source RJR Nabisco Wingstop Sega Gaming HotJobs.com Scientific Games Prestolite Electric Jackson Hewitt Imagitas Halogen Logic Works Optical Capital Group Böwe Bell & Howell Celion Networks Imperial Technologies Thermal Industries National Product Services Safeway Homestead Technologies Stratford Safety Products Kodeos Communications National Packaging Wythe Will Distributing Associated Chemists Physicians Dialysis W.A. Butler Co Remington Arms NeoWorld Holdings Success Lab Nu Visions Manufacturing Jamba Juice Advance Group Vicorp Restaurants Transtar Metals All Seasons Services 24 Hour Fitness E.D. Smith Office Depot Dr. Leonard’s American Package Express Jenny Craig Connor Aga Sports Barneys Melita International Global Trade Technologies Mimi’s Cafe Starent Networks Home Service Store Archives One Tri-State Alarm Rite Aid At Home America Atlas Die Laser Excel Hospitality Mints Hickory Farms MacKnight Smoked Foods Argosy Industries Breen Color Concentrates Source 4 Polymer Extruded Products Coastal Resources E. P. Pro Maranatha Natural Foods Quizno’s Subs Interdent Inc. National Print Group Quaker Fabric Image Entertainment L & L Nursery Euro Design Therma Tru Doors Creative Forming McLeod USA Outdoor Seasons Cici’s Pizza General American Corporation Westwood One Web Ideals PGI, Inc Sturm Foods Pioneer Window Trident International Overhill Farms Pengo Corporation Lab Tops Jade Equipment Icarz, Inc.