InSight

Exit and Growth Strategies for Middle Market Businesses

Funding Your Transition From Executive to Owner

By Roy Graham | Aug 11, 2010

You are an accomplished senior level executive with a strong record of success in corporate America but you want more. You understand your industry as well as anyone and you want to capitalize on that knowledge by acquiring a company that you can grow to build wealth. How do you get started? What is the process? Is it doable?

You may want to start by asking yourself if you would want to acquire the company that you are currently working. If the answer is yes and you believe ownership might be receptive, a management buyout may be a great place to start. After all, you already know your own company so you probably know of any skeletons that may be hidden away as well as the kinds of opportunity that exist. Your due diligence should be easier and you’ll have little, if any, learning curve.

Perhaps your company isn’t available, it’s not attractive or you have an alternative strategy and wish to focus on acquiring another company or a buildup of companies. These are all viable options for which there will likely be multiple sources of funding if you are well prepared and understand the process.

There are many investment groups that will fall over each other in their rush for the opportunity to back a strong management team and a good target company. You can reach out directly to private equity groups and try to handle the process yourself but you may find it frustrating as you navigate a myriad of hurdles. There are well over two thousand private equity groups and they all have their own criteria and unique personalities. Their fund sizes vary as do their minimum and maximum investments, industry interests, investment horizons, exit strategies and a host of other factors. You are likely to find that the use of an investment banker can make your search much less overwhelming and more likely to result in successful funding with a maximum compensation package for you.

A good investment banker can identify private equity groups that match your objectives and will have the relationships and visibility that open doors and grab the attention of these investors. He can help you think through your objectives and prepare an investment thesis and strategy. He can identify acquisition targets, open conversations with owners, analyze financial information, assist in valuation, negotiate a favorable Letter of Intent and prepare analyses and summaries necessary to both secure investor funding and to close the target transaction.

One of the key documents for the executive in this process is the management agreement. This is the document that typically spells out among other things; co-investment requirements, salaries and perhaps most importantly, the amount of equity that the management team will receive. Like all elements of the agreement, equity allocations are negotiable but they are frequently tied to an internal rate of return calculation made upon exit of the investment and often provide increasing participation as the IRR on the investment increases.

A good investment banker will work to cultivate interest among a group of potential private equity investors simultaneously. The resulting competition will result in a management agreement that provides the greatest incentives and rewards for the management team. Generally, there is little cost to the executive as private equity groups value the filtering, due diligence and preparation that investment bankers provide and are pleased to provide compensation for these services. With the help of a good investment banker, if you are an accomplished senior executive with an entrepreneurial spirit, determination and a desire to build wealth you can more than likely find a financial partner to help you achieve your vision.

posted by Roy Graham


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