ATI Capital Group, Inc.
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ATI Capital Group, Inc.
1674 Keller Parkway

Suite 140
Keller, Texas 76248



ATI Capital Group, Inc.
403 Gilead Rd. Suite J
Huntersville, NC 28078

Corporate Transition Strategies

Recapitalization

When deciding whether to sell your Company to an individual, corporation or qualified plan, it is imperative that a recapitalization and\or “leveraged buy-out” be examined as a possible corporate transition strategy. A leveraged buy-out or a “management buy-out” is an internal transition strategy that uses the future cash flow and financial strength of the Company to effectuate such a transaction. Many times this type of a corporate transaction is looked at as an alternative to or in conjunction with a capital infusion from a private equity group. ATICG has the ability to calculate, in no uncertain terms, the cost of undertaking such a transaction, the result to the seller and the impact on the business. Let’s take a look as to how a typical transaction might work.

Assumptions

AC Manufacturing Company has $3,000,000 in EBITDA and at five times EBITDA is valued at $15,000,000. Single owner, Mr. Smith, is willing to sell the stock, not the assets, at $12,000,000. Investment grade cash flow lenders are willing to loan the Company up to 2.5 times EBITDA or $7,500,000 using the assets in the Company as collateral. $12,000,000 less $7,500,000 leaves a $4,500,000 shortfall. Let’s assume Mr. Smith is not willing to take back a note for the difference but wants management to have the Company; he is not willing to it sell to an unrelated third party. A Private Equity Group (“PEG”) would invest say $5,000,000 allowing $500,000 for working capital. The PEG would receive either common or convertible preferred stock with a dividend preference or cumulative dividend attached to the preferred or common portion of the investment. This is designed to give them an ongoing return on their investment. They would insert one or more members of their organization on the board of directors and monitor closely the ongoing results of operation of AC Manufacturing. They would also require an exit strategy for three to five years down the road for their equity piece.

Result

Mr. Smith sells 100% of the Company for slightly less than its current worth in exchange for getting a stock sale and capital gain treatment. His total redemption and\or sale allows him to “walk away.”
The Company’s management continues to manage the day to day operations and they purchase 49% for a small amount of cash. Bonuses can be paid to management which management uses to acquire 49% of the shares in the treasury. The PEG infuses $5,000,000 and receives 51% of the total equity of the Company.

Is this the best result for the parties?

On the surface this looks like a very reasonable transaction for all parties involved but is it? Here is just a short list of the questions ATICG would ask before recommending the parties engage in a transaction like this:

  • How long is it going to take to pay off the primary debt?
  • How much working capital is going to be necessary to not only survive but thrive?
  • Does the owner understand the probability of success of this transaction?
  • Does management clearly understand EXACTLY what is gong to be required of them to make this transaction work and are they willing to do it?
  • Does management realize the benefit to them should the transaction progress successfully?
  • What is the after tax cost to the Company in servicing the debt and paying the required cumulative dividend payments on the preferred stock? The Company has to continue to pay taxes on its income, service the primary debt with AFTER tax dollars and pay the dividends with AFTER tax dollars. How much growth is going to be necessary to allow for the ability to buy out the 51% owned by the PEG in three to five years?
  • Who is gong to determine the value of the 51% when sold by the PEG?
  • What if the value is more than contractually agreed to?
  • What if the value is less than what is contractually agreed to?
  • How is the Company going to borrow the money to pay off the PEG if it requires multiples of EBITDA that are in excess of what a primarily lender will lend to?
  • If management can’t afford to buy, can the PEG sell to a third party?

The answers to these questions could make this option the most expensive $5,000,000 ever borrowed by the Company. ATICG works through all the issues clearly showing all parties, the seller and Company what they are getting into. We show the Company this alternative side by side with other options that are available in the market place giving current ownership\management the ability to compare and make the best overall business decision.

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