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Mike started his business literally out of the back of his pick-up truck - as a contractor doing installations for the local cable company. Over the years, he created his own company to do similar work for larger companies in the region. He and his few employees celebrated their first $100,000 in billings with a bottle of champagne. As the industry grew, so did Mike's small business. Contractors became employees, trucks needed to be purchased and working capital needs expanded, as Mike needed to cover payroll and operating expenses. Mike's company earned a strong reputation within the region for doing consistent and reliable work. As the industry began to consolidate, Mike's growth potential was evident. Relationships that had previously had single points of contact were now being spread across a wider base. Demand for Mike's services were growing exponentially as the industry grew and diversified into a broader communications-based network.
Mike's bank continued to support the growth with working capital lines of credit and equipment financing for his fleet of vehicles. However, Mike was suffering. He was one person trying to own, operate, and manage this company single-handedly. He knew the potential to fail was as great as the potential to succeed. How much growth could he handle himself - both in terms of management and financing? He had been working to build a strong team of leaders to support him. But that process lagged behind the growth in the markets and opportunities that were opening to Mike everyday.
Mike also knew that his bank would only be comfortable supporting his growth up to a point. He had no succession plan and no significant investors behind him. The bank saw real risk in financing the growth of a company with a single leader and decision-maker. What would happen to the company if something happened to Mike? Mike weighed his options. His vision told him that his company had not even begun to reach its potential. He also knew that the consolidations and resulting growth in his customers' industry had just begun. His task was to determine how to appropriately manage those relationships and control the growth in his business. He considered the following:
Mike knew that going it alone had great risks, both personally and professionally. His family needed him to be around more, he was feeling the effects of the travel and the stress, and he knew the company had a finite amount of capital to finance the growth. But, he did not feel that he was ready to sell. He had spent years building this business and to sell it at the peak of its potential would be his most difficult, and personally compromising, decision. The concept of finding a partner intrigued him. But he wanted to make sure he went about it the right way. Mike spoke to his accountant - a trusted friend and advisor. His accountant explained that with a partner, Mike would have to give up some owner ship and, potentially, some control. Another challenge would be finding the right partner and determining his or her motivations - is the individual a strategic buyer or a financial buyer?
With the help of his accountant, Mike began to interview potential partners. When he finally met his match, it was clear. It was a firm interested in investing capital into the business for a significant equity investment. However, it recognized and appreciated Mike's value to the business - both in developing the company to this point and, more importantly, in providing future growth. It believed that it was important to support Mike's client relationship development. Its vision for the company was similar to Mike's - grow the company over the next three years and then sell it at the peak of its potential, either through an IPO, or to a strategic buyer. This fit Mike's overall personal and professional goals. All parties in the relationship won as a result of the partnering. Mike retained enough ownership to reap additional financial rewards. He was granted the control and decision-making power that he needed to continue the company towards its goal. His partner provided strong equity support to the transaction, removed almost 100% of the administrative burden of running the company, and helped develop a strong and dedicated management team to support Mike's effort. Finally, Mike's partner recognized Mike's relationship with his bank and worked with it to structure financing for the new company to support the financial requirements that were needed to sustain its growth.
Updated: January 1, 2013
This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or as a determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on their objectives, financial situations, and particular needs. This article is not designed or intended to provide financial, tax, legal, accounting, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought.
© 2013 Wilmington Trust Corporation.