How to use an investment fund in a progressive shares transmission?

Using an investment fund in a shares transmission...

Using an investment fund and introducing investors to the capital may appear inconsistent with the brand ”Family Businesses”.

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Working businessmen

However, engaging a minority investor, who shares the same objectives with the family, could be a successful solution for daily operations as the funding could be spread over several years.

The following case successfully demonstrates the interest and the implementation conditions of such an investment fund:

A company is owned in the majority by the first generation shareholders. They are inactive in the day to day business. They want to leave the company by selling their shares at “the highest price”. The company, ideally positioned in the market, is offering a recurring profitability and is attractive for many competitors. The sellers have also received a bid from a competitor.

Active minority shareholders want to take full control of the company in order to sustain management and family values. The economic viability of the company allows them to create a holding company and to service bank debt (Leveraged Buyout (LBO) financing over 7 years) to finance shares acquisition. Moreover, they are able to offer the same price and conditions as the competitor bid.

However this group is facing a major challenge: a significant number of stakeholders will retire during the debt repayment phase. Considering company projects for external growth, it also doesn’t seem appropriate to borrow again to purchase shares until the “senior debt” is refunded.

Introducing an investment fund seems to be the best way to match these two different objectives (external growth and shares acquisition). The group decided to offer an important minority stake of share capital to an investment fund. The main interest of the fund is an almost guaranteed IRR during its investment period (7 years). However the main obligation of the fund is to ensure shares liquidity of any outgoing throughout the LBO. Shareholders’ agreement specifies that the shares will be offered (1) first to existing shareholders (2) then to the investment fund. Clear and simple terms included in the agreement also ensure a “fair price” for the outgoing shareholders.

This proposal received the support of all shareholders (active and inactive) and ensures that the firm transition is achieved in accordance with family values.

Many lessons can be output from this case. However, some key factors should be taken into consideration for the success of this type of operation:

  • Stable and recurring profitability, as well as a low level of debts

  • An investment fund with “reasonable” requirements (local action), looking for a safe investment (lower IRR)

  • A clear shareholder’s agreement including simple and understandable terms for price evaluation. This is the key for ensuring a secure and fair price of the shares during the LBO.

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