Focused exclusively on helping our clients sell businesses, raise capital and acquire businesses
Links Capital Partners are specialists in working with private equity firms, institutional investors and strategic purchases in raising capital and divesting of businesses. We have the expertise and understanding of where your company is in the business cycle with respect to valuation metrics such as cash flow normalizations, EBITDA multiples, leverage ratios, working capital expectations and redundant assets which are keys to a successful transaction.
Links Capital confidentially works with their clients from inception to completion of a divestiture event, including the positioning of the company, creation of a Confidential Information Memorandum, detailed financial & market analysis, sourcing of buyers (strategic or institutional), on-going updates & deal analysis, negotiation of all terms & conditions of the transaction, due diligence including data room creation, preparing management for meetings and working with accountants, lawyers and tax experts for a successful closing.
Types of Divestitures
Strategic buyers are either vertically or horizontally integrated firms that would experience synergistic value through the acquisition. A vertically integrated company is looking at purchasing one of their suppliers that are integral to their product or service. Horizontally integrated companies are businesses that are producing similar products or services. Strategic purchasers can pay up for transactions as the integration of two businesses may provide a value that may far outweigh the sum of the two companies individually valued. A sale to a horizontal strategic purchaser may result in a higher percentage of cash proceeds as they have the industry expertise and may not need management post-transaction. We are seeing more strategic purchasers being backed by private equity funds.
Financial buyers are comprised of bank-sponsored and private equity funds (independent or institutional). Financial sales often result in a growth or acquisition plan with follow-on transactions that can enhance shareholder value. Financial buyers are not involved in the active management of business but rather rely on the existing management team. The typical financial buyer will leverage the business with an appropriate amount of debt reducing the equity capital in a transaction. Additional capital is often available to grow for working capital additions and capital expenditures for growth initiatives. Financial buyers usually have a finite time period in which they invest (4-10 years) and typically plan for a liquidity event for some or all shareholders.
A management buyout is a succession plan that involves the existing management purchasing the shares from the owner. Management buyout transactions often have the involvement of some outside capital provider partnering to complete the transaction or the transaction may happen slowly working with the owners over a longer period of time without any outside financial assistance. Management teams have the knowledge but lack the financial wherewithal to complete these transactions on their own. Financial structuring is often required to get the transaction completed, and in many cases, the management team may result in having majority ownership. Links has acted for both management teams and the sellers in these types of transactions.
Many organizations often acquire businesses and after a period of time may change strategic direction. When this happens, businesses that were once a business fit with the organization are no longer a fit. Spinoffs may provide an opportunity for the right strategic purchaser. In many instances, the businesses may be sold back to the previous owners. Links has acted for previous owners in structuring, financing and acquiring spinoff businesses.
Links Capital works with business owners who are planning to sell their business in the next two to five years. Planning is of the utmost importance to be able to monetize maximum value from a divestiture event. Links’ will work with the owners and management to understand what is required from due diligence, financial analysis, competitor analysis, valuation, management meetings & preparation, and prospective purchaser lists (strategic & private equity) and will help position the company for a future transaction.
PRIVATE EQUITY & SUBORDINATED DEBT FINANCINGS
Links Capital specializes in raising equity capital and subordinated debt from institutional investors such as private equity funds, pension funds and insurance companies. Links in-depth knowledge of the institutional equity markets helps position their clients to attain attractive financing for growth, acquisitions and recapitalizations through their network of funders.
Types of Financings
There are various types of debt financings that a company can enter into to capitalize their business. Each type of financing comes with a different set of related costs, covenants and conditions.
Operating Lines of Credit
Operating lines of credit are financings typically provided by chartered banks that margin accounts receivable and inventory based on certain percentages which may be capped by the bank.
- Accounts Receivable may be margined at 75% for all receivables under 90 days
- Inventory margined at 50% capped at a total maximum amount of finished inventory at $4.0 million
The bank may place working capital, cash flow coverage and debt covenants on the financing and will review the accounts receivable and inventory on a monthly basis. Operating lines of credit may be renewed on annual basis and the pricing of the financing will be based on the strength of the company. Operating lines have a maximum authorized amount and the borrower may or may not choose to use any amount of the operating line. As long as the operating line is maintained within the authorized amount there are no required principal payments and only interest payments are due monthly. Inactive loans may be subject to standby fees.
Senior debt is a longer term fixed amount of financing (5 years and longer) that is typically secured by certain assets like land and building or equipment, other assets may also be pledged as security. Providers of senior debt may be chartered banks and other niche finance companies that are willing to take a security interest in the assets. Senior debt usually will take a second charge in security behind the operating line of credit. Pricing of debt will be based on the financial strength of the company and the value of the underlying assets that are being secured. Senior debt may also have working capital, cash flow and debt covenants as part of the agreement. Senior debt typically has a fixed principal payment and interest payments (may be fixed or floating interest) that must be paid as per the scheduled payment plan.
Asset Based Lending
More aggressive lending that is typically found from chartered banks and other niche finance organizations. These loans typically prefer more liquid assets such as accounts receivables and inventory which are typically margined higher percentage and caps than what are found with operating lines of credit. Asset based lenders will also consider equipment and other security that the company may be able to provide. There are more stringent reporting requirements when compared to a typical operating lines of credit, as these lenders are taking more risk and will very closely monitor all financial aspects of the company, especially the cash flow of the business and the variability in the value of the current assets. The cost of asset based lending is typically higher than what one would expect to pay for an operating line of credit.
Generating sufficient cash flow is the main characteristic for the subordinated debt lender as they have little or no security. From a security standpoint the subordinated debt sits behind the operating line of credit and the senior debt who both hope to be fully secured.
A typical structure for a subordinated debt financing is very similar to senior debt, the only difference being is the security position of the debt. The subordinated debt lender does not want their debt paid off in full till the end of the term. Their main objective is to earn the coupon that they are charging on the debt. Dependent on the structure of the loan and the inter-lender agreement, the subordinated debt may be viewed as equity in the eyes of the senior lender. Subordinated debt lenders may have provisions in the loan agreements that allow for changes to interest or other clauses should the performance of the company not meet the projected forecasts or maintain covenants established by the lender.
Convertible debt is very similar to subordinated debt with the exception that the debtholder has the right to convert the debt to equity at a previously agreed upon price.
Mezzanine debt is comprised of term debt and an equity component based on a valuation that is less dilutive than an all equity transaction. The term component has a coupon rate that offsets some of the risk allowing for less dilution from a share perspective. The mezzanine lender receives an equity position at nominal cost in the business (not control), and they want their debt paid off as quickly as possible to increase their internal rate of return on the investment.
A typical structure for a mezzanine debt financing would be very similar to subordinated debt from a debt perspective but with additional clauses that make the investment as whole act more like equity.
Expectations over and above subordinated debt conditions may include the following:
- More rigorous due diligence
- Annual cash sweeps based on free cash flow that reduce the amount of the principal quicker
- Pledge of shares
- Voting trust agreements
- Shareholder agreements
- Board of director’s representation
- Call and put rights
Links Capital can also help your company complete the acquisition of a targeted firm in an advisory role from valuation through negotiation and closing. These transactions could range from acquisitions to leveraged and management buyouts, including private equity buyouts.