Extending your financial reach
Tourangeau give the example of a company wanting to purchase another business for $25 million.
A seller might accept to roll over part of their equity into the buyer’s company, meaning that they would maintain a small ownership stake. In Tourangeau’s example, the seller rolls over $2 million in equity and the buyer invests $4 million for the acquisition.
“That leaves $19M to cover with bank loans,” Tourangeau says. “Those come with interest and strict repayment terms, which can limit cash flow and make it hard to run the business profitably.”
A minority investor offsets that burden. “If they bring $7.0 million in a mix of common and preferred equity, the amount to be financed drops to $12 million. Depending on the loan terms, this can mean less interest on the transaction, so the buyer retains more capital to operate the business and reaches break-even point sooner.”
Minority equity deal structure example
Partners’ equity contributions
Vendor rollover equity
Minority investor equity
Minority investor preferred shares equity
Balance to finance through loans
The size of the business influences financing terms, he notes. “When buying bigger and more mature, stable businesses, you have access to better terms and conditions from senior lenders and amortization periods are often longer.”
In some cases, a minority investor can provide up to 49% of the capital for an acquisition, allowing the buyer to consider bigger purchases than would otherwise be possible with their own equity, Tourangeau says.
Adding value beyond the transaction
When choosing a minority investor, it’s important to choose the right one, Tourangeau adds. He recommends cultivating relationships with potential investment funds or financial institutions early, before even identifying a business to acquire.
“You’re going to be working together, so you need to be totally aligned. It’s worth taking the time to find the right fit.”
This is even more important since minority investors bring more than cash to a business purchase.
“An experienced minority investor will bring a unique set of eyes and skills to the process and help along the buyer in structuring the transaction in a way that will ensure it can be funded the right way and will also help during the negotiations with the vendor” Tourangeau explains.
“They can draw on all the deals they’ve done before to help put the buyer and the seller at ease, oversee the due diligence process, and make sure the deal is structured to optimize the business.”
The other way minority investors can help is by serving as advisors and partners in the business after the purchase is done.
He adds that many minority investors also have good relationships with banks to help entrepreneurs access additional financing. And they typically have their own business network of advisors, partners and customers that they can introduce.
“The other way minority investors can help is by serving as advisors and partners in the business after the purchase is done,” Tourangeau notes.
“You still have strategic control as majority shareholder, but the minority partner can provide expert guidance going forward. We often help finding new customers and suppliers, set up the board of directors, introduce resources for key hirings for example, when we are involved.”