M&A Insights

Minority Liquidity: Great Way to Protect Your Downside, Retain Upside and Control

Minority Liquidity: Great Way to Protect Your Downside, Retain Upside and Control

Despite the overwhelming number of investors/acquirers approaching companies these days, we feel it makes sense to call out an investment option that not a lot of funds employ, and many entrepreneurs may not know about.

Minority liquidity or a minority recapitalization is an equity investment by a private equity firm, where the use of proceeds is liquidity to shareholders vs. the monies staying in the business for growth. Not a lot of funds make these types of investments, as it disincentivizes owner operators to continue creating value with the same rigor as before, when the vast majority of their wealth was tied up in the company. Firms that make these investments pursue high growth, profitable companies, who do not want or arguably need a capital infusion into the business, therefore this may be the only way for the investor to get into such an attractive business.

Companies find this type of investment attractive as it allows shareholders to diversify their holdings by selling a minority of their equity, often 25-49%, at a favorable valuation, while retaining control of their business, and focusing on a larger exit 3-5 years down the line. In the interim, it gives owner/operators an ability to hedge against a downturn that can wipe out equity value (please note if a growth company becomes flat or down growth wise, valuations can be reduced by a material amount, as a whole category of growth-focused investors/acquirers will no longer be interested, and there may only be “value” type folks interested, which as their name suggests aren’t paying premium valuations).

In addition to owner operators covering their downside, companies bring on a private equity institution which will not invest unless they feel they can make 2-3x their money in 3-5 years, so they support growth and value creation in areas incremental to the current operations such as with finance, accounting, acquisitions, strategic direction, and preparing the company for an ideally much larger exit down the line.

We at HRC have not only been part of PE groups who make such minority liquidity investments, but have developed a robust network of firms where this is a standard practice, and can share more particulars as well as assess the fit for such firms and your company. Feel free to respond herein, to schedule a call to discuss.

M&A Advisory Drives Significant ROI

M&A Advisory Drives Significant ROI

You hear more and more about the importance of ROI-based selling, to demonstrate to customers the potential tangible value of your product and service, especially as we may be heading into a recession where expenses tighten up. This is no different in investment banking, where the ability to demonstrate value, in relation to fees, is critical in customers’ decision-making process.

In three M&A transactions where HRC represented sellers, ran processes, and negotiated multiple acquisition offers, the end results equated to ROIs between 3x, to as high as 28xThe ROI here is calculated by taking the value increase (final sale price minus the initial acquisition offer) divided by the sum of all HRC’s fees for the transaction (retainers, success fees, etc.).

While the 28x may be viewed as an outlier, HRC is seeing more consistency around an expected ROI between 3-5x, due to the ability to bring in highly strategic acquirers where there’s existing relationships, run a tight competitive process, and negotiate a market transaction.

This type of ROI potential is often prevalent in situations where a seller is negotiating an acquisition with one buyer without current investment banking representation. In two of the three cases noted above, including the 28x case, this was the current situation before HRC was engaged.

We welcome discussing any M&A or capital raise opportunities you may be exploring and how we may be helpful.

About: Harbor Ridge Capital is a leading M&A boutique, with a focus on technology verticals, including software, IT/Cloud services, marketing technology, and healthcare IT, in the $5-50mm revenue or value range. The group has developed extensive expertise in these industries over a 20-year period, as well as fostered relationships with the most active strategic acquirers and private equity investors. Learn more at www.harborridgecap.com.

The Principal of Harbor Ridge Capital is a registered representative of, and Securities and Investment Banking services are offered through, Ashland Securities, LLC, Member FINRA, SIPC. Harbor Ridge Capital and Ashland Securities are separate and unaffiliated entities. This email/information does not constitute an offer, invitation or recommendation to buy, sell, subscribe for or issue any securities.

Buy-Side Advisory Grew Client EBITDA from $3mm to $25mm Overnight

Buy-Side Advisory Grew Client EBITDA from $3mm to $25mm Overnight

When first learning of this acquisition opportunity, the first thought was, this will take a miracle to get done. The Client (“RM”), the second largest player in the domain name monetization space, a form of internet marketing, with roughly $3mm of EBITDA, was interested in acquiring its main competitor and the largest player in the space, Target (“DS”), which had around $20mm of EBITDA at the time. Beyond the obvious size differential in seller vs. buyer, there were other material challenges

RM was based in Zurich, Switzerland, while DS was based Los Angeles

The industry had declined since the recession, yet flattened out in recent years

Google, their largest supplier, represented 80% of revenue

Very niche, nuanced business; hard for investors to understand 

Adtech had soured most investors due to the volatile nature of the business, and overarching control of Google 

RM was not private equity backed, and hadn’t made an acquisition before 


All the more reason for RM to engage a specialist like HRC, to advise on the transaction, raise the financing, help with the integration plans, and other areas which were uncharted territory for RM. While the challenges were plentiful, and this certainly classified as a “hairy” deal, there were several key fundamentals making the opportunity very compelling and likely to get done, with a properly run process. This included:

• An attractive acquisition multiple of DS

Large amount of pro-forma EBITDA to raise capital against – $25mm

Low pro-forma leverage multiple 

RM management knowing the business inside and out, with significant synergies

RM having strong management team to lead the combined business


With this in mind, HRC was up for the challenge, and we engaged in a formal contract, (monthly retainer plus success fee), and got to work. The sellers were interested yet required some coaxing given RM’s size, lack of private equity backing, etc.., yet were cognizant of the strong fit and synergies. After much back and forth, the term sheet for the acquisition was signed, with a 60-day window to raise financing, diligence the transaction, and close the deal.  

With any deal, the way the company is positioned and how the story is told is immensely important. HRC having extensive private equity experience in addition to advisory, proved highly valuable in how to best tell the story, the positioning, and how to highlight key aspects of the business. Further, our comprehensive fundraising materials spoke the same language to the target audience of investors, answering the expected questions with tangible operational and financial information. Additionally, we needed to combat the stated challenges, yet be open about certain negative elements, and address them head on, vs. any kind of omission of the truth. This all ensured the highest likelihood of closing and at the strongest valuation. Ultimately this deal was not for everyone, and with HRC’s depth of network, and thorough process, the right investors were identified, which were comfortable with the level of risk/reward of the deal.

After all was said and done, the transaction closed, and $50mm was raised with two different types of debt financing. With the acquisition, RM grew their business from $3mm to $25mm in EBITDA, and a top line north of $100mm, all with minimal equity dilution. Post-acquisition the combined company was undeniably the industry leader, paid down all of its debt after a few years, and significantly arbitraged the value of the equity. 

HRC proved instrumental through every step of the transaction, and had developed a strong working with relationship with the management of Rook. So much so that after the transaction, Cyrus Maghami of HRC was offered an interim-CFO role with the company that he held for nearly a year after the closing.  

About: Harbor Ridge Capital is a leading M&A boutique, with a focus on technology verticals, including software, IT/Cloud services, marketing technology, and healthcare IT. Learn more at www.harborridgecap.com. 

Feel free to reply herein to discuss any strategic opportunities you may be exploring.

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