Selling A Business – Alternate Deal Structures

By Generational Equity


In past articles we have described one type of deal structure: the partial sale. This deal structure is used primarily by equity firms, and it encourages existing ownership and management to stay with the acquired entity post-acquisition. They are “encouraged” to do this by retaining an equity stake in the company (usually less than 50%). This allows them to participate in the growth and expansion of the company without assuming 100% of the risk going forward. It is also beneficial because typically the equity firm will provide professional management, financial engineering, and marketing/sales talent that the original entity would not have had access to.

But, most importantly, it also allows existing ownership and management teams to participate in a “second bite of the apple” later when a much larger organization is either taken public or sold again. This secondary liquidity event can be quite profitable for original owners. So it is a great structure if you have plans to grow your business but need access to capital/talent to do so.

Example of An Alternate Deal Structure

A deal was announced recently that demonstrates this structure in action. The Beekman Group (Beekman) recently announced that it had invested in NorthStar Alarm Services (NorthStar).

According to their website, Beekman “is dedicated to bringing capital and operational resources to small and middle-market companies through its team of seasoned private equity professionals and experienced industry operating partners.” Essentially Beekman is an equity firm that specializes in investing in small privately held companies with the goal of helping them grow.

Here is the description of the philosophy that guides them in their acquisition plans:

“A critical component to our investment philosophy is developing and maintaining a true partnership with management. The Principals of our firm along with our Industry Partners bring over 250 years of management, operating and financial experience to our portfolio companies. Together with existing management, we will endeavor to create long-term, sustainable value by actively working with and supporting our companies in four critical areas: Strategy, Management, Operations, and Finance.”

I have highlighted the phrase “true partnership with management” for a reason. Beekman, like hundreds of other equity firms that specialize in investing in smaller companies, do so by partnering with businesses that have maxed out their growth potential internally and need the expertise and capital these firms bring to their investments. If this describes your situation, then finding a partner like Beekman could be very beneficial.

NorthStar “is a leading provider of residential security alarm installation and monitoring services with more than $1.0 million of recurring monthly revenue. Founded in 2000 and headquartered in Orem, Utah, NorthStar has grown rapidly in recent years, and is currently one of the 40 largest security alarm companies in the United States.”

According to the press release, Beekman has been interested in the security alarm industry for several years. They obviously did their homework during this timeframe and looked for a platform company like NorthStar that although is obviously healthy and growing, still has significant growth opportunities in front of it.

The key phrase in the press release, though, is this:

“Company management participated on the deal, and will maintain a significant ownership interest.”

As I described earlier, this deal structure is a true win-win for both parties. Beekman now has a partner that allows it to expand further in the security alarm industry, and NorthStar founder Jason Christensen, as well as his management team, now has the capital and professional leadership needed to reach the next level in the company’s growth.

What Are Your Exit Goals?

Many entrepreneurs who attend a Generational Equity M&A seminars assume that a 100% sale is the only route they can take. In fact, quite often when we take clients to market, they are pleased to learn that there are buyers who are willing and interested in allowing them to stay with the company for 3-5 years to help it continue growing.

We meet business owners all the time that are from one end of the spectrum to the other in terms of motivations for retaining us. Some folks are just tired, burned out, and ready to retire and move on. If that describes where you are in life, we can help you.

Others, though, come to the realization that they really would like to help their legacy reach its potential and decide that working alongside a partner would be quite rewarding, both emotionally and financially. If this is where you might be, we likewise can help you.

Generational Equity is the leading lower middle-market M&A advisory firm in North America. Don’t just take my word for it, look at the latest M&A ranking tables compiled by Thomson Reuters. Chances are good that our M&A professionals can help you find buyers and/or investors for your business as well. 

Of course not every business is a likely candidate to be acquired by a private equity group (PEG). However, without the aid of an experienced M&A advisor, you could be missing out on all sorts of buyer groups. Don’t make that mistake. Contact us and we will help ensure you don’t!

Carl Doerksen is the Director of Corporate Development at Generational Equity.

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