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Strategic Equity Investors do a lot more than provide capital. Here's an example of a transaction that one of our clients did. Notice the owners had three key objectives they wanted to solve. None of the objectives revolved around getting the highest price for the business. In fact, the owners wanted to continue to grow the business. If you would like more examples of Strategic Equity Investments, subscribe to our case study newsletter.
The founding entrepreneurs became involved in their business by buying a specialty chemical company. They used angel investors to help finance the original purchase. They built it over the years by purchasing add-on compatible companies. Now a large number of outside investors were becoming a distraction. The founders wanted some liquidity for themselves and an equity piece for some of the younger managers and to grow the business to the next level. Of course, they wanted to maintain as much equity as possible.
... manufactured and distributed inorganic pigments to the paint industry. The founders, whenever they decided to acquire another business put up some money themselves and brought in outside passive investors. Over 15 years, there were a number of investors with very diverse objectives. The outside investors owned about 50% of the business. Revenues were $60 million with EBITDA of 10%.
A Private Equity Investor crafted a transaction that met all the objectives of the entrepreneurs. They paid $30 million for the business. Half went to the outside investors. The other half was split by the two entrepreneurs. In addition, the two founders kept 30% of the new company and the younger managers split 20%. Now that the younger managers were owners, they reduced costs significantly and increased revenue. In the next three years, they did a couple of small acquisitions, but doubled the EBITDA. Because of the increased cash flow, the acquisition debt was aggressively paid down.
Unsolicited, a foreign firm decided they needed a presence in the United States. They offered nearly $80 million. It was an offer none of the equity holders could refuse. After paying off the balance of the acquisition debt, the founders retired. They made more money the second time than they did with the first liquidity event. Eight years later, the foreign firm decided to divest the operation. A brand-name buyout firm now has the firm in its portfolio. It's doing around $750 million in revenue, and the younger managers now own a piece of the business again.
Solving an equity problem, allowing key management to have some ownership and getting wealthy at the same time ... the founding entrepreneurs walked away with about $39 million in four years for a share of EBITDA that was around $3 million. That's a 13-times multiple in four years.
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