Last month, Part I on this topic discussed the problem facing a Remaining Spouse when the Departing Spouse rejects a buyout offer of a modest down payment and a long installment note: How to raise sufficient cash to avoid a premature forced sale of the business? Specifically, Part I discussed the challenges in finding a willing lender to fund that buyout. Read it here. This Part II will examine potential equity investment sources for the required cash.
Financial Investors. As an alternative or supplement to lenders, the Remaining Spouse may seek equity investment, accepting the prospect of giving up some percentage ownership to a third party. Venture capital firms could be a source for younger companies with, for example, less than $5 million in revenue but in high-growth segments such as disruptive technologies, biotech or new media. However, some privately-held companies may be better suited to search for private equity firms who invest larger amounts into more mature companies (e.g., with more than $25 million in revenues), in exchange for a larger ownership percentage. These are sophisticated investment professionals experienced at analyzing opportunity and risk, and negotiating their ownership percentage and other terms. Their focus is return-on-investment, and they will own pieces of a variety of companies in their investment portfolio, each with a projected time frame to their exit strategy.
But make no mistake: finding and negotiating acceptable terms with these investors requires a combination of skill, expert advice, and openness to having an outside owner. Depending on a variety of factors, such as current equity market conditions, the company’s maturity and further growth potential, and the amount of money needed, such investors may insist on a substantial minority, or even a majority, percentage ownership. They may require preferred stock, giving them priority returns on distributions, representation on the company’s Board, approval rights over major transactions, and warrants to purchase additional equity. All of this can be a bitter pill for the entrepreneurial owner to swallow, even if such investment is available. On the plus side, strong private equity firms can be a valuable business partner providing industry experience, contacts and commercial opportunities.
Strategic Investors. Alternatively, the Departing Spouse may look within the company’s industry for a potential strategic partner to invest. This could be a key customer who wants to ensure a continued supply and service level, or a complementary business that sees this investment as an avenue to expand its products or services or its geographical reach. As the name implies, this investment would fit into the business strategy of such a party, which may be a better fit for the entrepreneur than a financial investor looking for a return over a limited time frame. But the Departing Spouse will want to be confident of reaching an agreement, and having compatible objectives, before approaching another company in the industry.
Conclusion. There will be divorces involving successful closely-held businesses where the Remaining Spouse delivering a modest down payment with a long installment note will not be an acceptable solution for the Departing Spouse. This leaves the Remaining Spouse with the challenge of finding a lending or investment source to provide sufficient cash to make a lump sum payment or, at the least, a much more substantial down payment with a far shorter and smaller installment portion. Identifying and negotiating acceptable terms with those potential sources requires substantial experience and expertise. A qualified business attorney will have a network of investment bankers, funding sources and other professionals to help in this process.
