Capital Ideas | Corporate Finance Associates | Newsletter Q4 2018

Capital Ideas for Middle Market Businesses

Welcome to this issue of Capital Ideas, our newsletter dedicated to business selling, business buying and financial resources for mid-market companies.

Private Equity Recapitalizations – An Elegant Exit Option

By Jeffrey Wright, Managing Director
Minneapolis Office
Corporate Finance Associates

We find that all our owner clients are smart and are really good at running and growing their companies. But most are not experienced in M&A matters (that’s why they hire us). For most owners, an M&A transaction is a first time, last time experience. They are typically not aware of all the deal structure options available to them.

One misconception is that when owners sell their companies, it’s an “all or nothing” proposition. This is not necessarily the case.

One of the most interesting and potentially rewarding deal structures is a Private Equity Group (“PEG”) Recapitalization (“Recap”). In this scenario, an owner may sell part of the company and “rollover” a portion of equity into the newly created firm.

PEGs are to mature companies what venture capital firms are to early stage companies. PEGs raise money from institutional source such as pension funds and from very wealthy individuals. PEGs then typically invest this money by acquiring mature, profitable companies. Their goal is to aggressively grow the companies they acquire, then divest of them in several years in the future, targeting an annual return of 20% – 25% for their Limited Partner investors.

In contrast to a sale to a strategic buyer that has a management infrastructure in place, PEGs don’t necessarily have a management team at the ready to take over and run the acquired company. PEGs highly value transactions when existing management is enthusiastically willing to stay involved AND put their money where their mouth is by investing in the future with an equity rollover. This rollover amount is usually in the 10% - 40% range, but there are a handful of PEGs that will execute minority recaps.

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New Tax Law Encourages The Creation Of ESOPs


By Robert Massengill, Managing Director
Atlanta Office
Corporate Finance Associates

For years, the Small Business Administration (SBA) provided guaranties on certain senior bank loans for small companies.

question marks Given most all new ESOPs are leveraged, this was natural place get loans for ESOP transactions since the federal guaranties afforded SBA loans provided partial loss protection for banks. That said, the SBA rules created so many restrictions for ESOP transactions, the loan 7(a) program was essentially unused. In over 40+ years of advising on leveraged ESOPs, we have been involved in one and only one transaction using the SBA ESOP loan program.

Fortunately, that all changed on August 13, 2018.

After many years of lobbying by employee ownership advocates, several of the SBA ESOP financing restrictions were amended legislatively in the John S. McCain National Defense Authorization Act. The SBA now has a mandate to encourage employee ownership in part by making its loan guarantees more compatible. This done though a number of ways:

  • Back to Back Loans

    The vast majority of leveraged ESOPs involving external financing use a "back-to-back" loan structure, which was previously prohibited by the prior SBA loan regulations. Loans heretofore had to be made directly to the ESOP, which created many issues that were otherwise easily avoided. The new legislation relaxed the “ESOP borrower” requirement and now makes the typical ESOP loan structure work with the SBA’s requirements.

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Featured Acquisition - CFA Lexington

The Situation:

Concrete Construction Industry

The two joint owners were seeking to sell a 100% interest in the Company and to cease involvement in it after a reasonable transition period. CFA understood that this would severely limit potential buyer interest, especially since the Company manufactures specialty concrete equipment that one of the owners is the product development designer of.

The Solution:

We discussed the issue with the owners and the owner responsible for product development agreed that, with an agreeable arrangement, he would be willing to remain with the Company after the sale as the Product Development Manager and also to retain a minority ownership interest in the Company. The other owner also subsequently agreed to retain a minority ownership interest in the Company.


Our buyer outreach generated considerable interest from Private Equity Groups on a national basis. The buyer interest was based on the Company’s high historical and future projected revenue growth rates and high EBITDA margins. The Company’s intellectual property on the equipment it manufactures was also a key factor in the high level of buyer interest, as was the willingness of the two owners to remain involved with the Company after its sale. Our client received numerous Letters of Intent (“LOIs”) and ultimately chose to accept the offer from Blue Sage Capital and Hanover Partners.


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