Q: What exactly is a “minority equity buyout”?
A minority equity buyout is an investment where a business owner sells a minority equity position (less than 50%) in his or her company. This investment is not to be confused with a “minority growth equity” investment where the invested capital goes onto the company’s balance sheet to fund growth. Our capital is used for shareholder liquidity as the companies we invest in generate enough cash flow from operations to fund the company’s growth.
Q: Who is the typical business owner you seek to partner alongside?
We seek to partner with the business owner / operator who is typically between the ages of 40 and 60. This business owner typically has most of his or her net worth tied up in the business and would like to mitigate some of his or her risk by diversifying net worth. A business owner looking to retire is not a good candidate for our investment approach.
Q: Who is “not” an ideal business owner to partner alongside?
Business owners needing a lot of assistance with day to day operations are not a good fit for North River Group’s investment approach.
Q: Why would you want to purchase a minority equity position in a company?
With rare exceptions, in lower middle market companies, the best managers / operators are the entrepreneurs themselves who started the company. We believe such individuals perform the best when they are majority owner and their own boss. A+ managers / operators are very difficult to find. We prefer taking a minority ownership position behind a business owner where we trust his or her character and competency.
Q: What is your involvement post-closing of an investment?
Since we look to back A+ owner / operators, we typically do not get involved in day to day operational decisions. We prefer to be an asset to the business owner on high level strategic decisions including: financing decisions, tuck-in acquisitions, growth initiatives, when to sell 100%, etc. Furthermore, we like to think of ourselves as an extension of their business development efforts being a catalyst for new customers, acquisitions, acquirers, etc.
Q: What rights does the business owner retain in your investment approach?
- Majority equity ownership 51%+.
- Ability to sell 100% of the business at his or her choosing including “drag along” provisions re minority shareholders.
- Full operational autonomy on day to day business decisions.
Q: What rights does North River Group require as a minority shareholder?
- “Tag along” rights in any sale to a third party.
- Agreement with majority shareholder on any company debt increases / executive compensation increases above a certain threshold.
- A “put right” (ability to sell our shares back to company) exercisable typically at the earliest of 5 years from closing. While we would never make an investment with the intent to exercise such a put right, we do require such a liquidity mechanism as a non-controlling minority shareholder. The following provisions make this put right more palatable to the business owner:
- Valuation: typically set at the same time as our original investment at a “discount” to our original investment “multiple” of earnings.
- Payment: once notified of our intent to exercise the put right, the business owner has the option of either: i) opting to sell 100% of the company or ii) paying out the put right valuation over a period of 3 years.
Q: What are my other options for liquidity besides a minority equity buyout?
Ultimately, this question all boils down to how much “risk” an owner is willing to bear. We believe our equity approach allows the business owner to mitigate a lot of risk while preserving the upside from his post-closing ownership position. However, there are other options:
- Mezzanine debt: this type of financing would allow the business owner to have a relatively large liquidity event. However, current interest rates typically range from 10% to 15% with potential additional interest “paid in kind” and possibly equity warrants. These debt instruments are typically “interest only” for 5 years with the principal being due in full on the fifth anniversary. While this type of debt is typically “non-recourse” personally to the business owner, the high interest rate and other provisions can make it quite unpalatable to the debt averse entrepreneur.
- Bank financing: banks will lend against assets (A/R, inventory, etc.) to help with working capital. However, long term debt financing for shareholder liquidity many times requires a “personal guarantee.” If a business owner’s goal is to reduce risk, this type of debt might do just the opposite if business earnings subsequently deteriorate.
Q: What makes North River Group different from other private investment firms?
There are 2 main ways in which our firm differs:
- Minority equity investors: there simply aren’t many other private investment firms providing shareholder liquidity capital by purchasing minority ownership interests.
- Ability to buy and hold indefinitely: we do not operate in the traditional “10 year fund life” world of traditional private equity. Our investments are placed in an individual LLC with only one investment (versus individual LLC with many investments). This allows us the ability to “buy and hold” potentially into perpetuity.
Q: Why is North River Group okay investing over a long time horizon?
Simply stated, finding good management teams running good companies is an extremely hard task. When we find such a combination, we prefer to invest over the long term allowing the business owner’s and North River Group’s knowledge and capital to compound.
Q: Who are North River Group’s investors?
Our investors are high net worth individuals and families seeking long term capital appreciation.
Q: What is the typical timeline for making an investment?
The deal terms are set forth in a Letter of Intent. Once this document is agreed upon by the business owner and North River Group, closing the investment would typically take place at the latest of 3 months from signing. During this time, business due diligence would take place. This entails an outside accounting firm performing a quality of earnings analysis on the company financials, customer/vendor visits, background checks, etc. Finally, legal documents are drafted prior to closing.