Divestopedia recently asked James Darnell of KLH Capital to give some insight on family succession transactions. The following is an excerpt from his response. The full response can be read on divestopedia.com.
Q: Your firm has executed a number of family succession focused recapitalizations. Can you explain what that is? Also, is private equity a potential capital solution for family succession transactions?
The trend in the market right now is that the baby boomers who are the largest segment of the population are reaching retirement. These are the people that have built companies and built great businesses. Now reaching a point in their lives where they have achieved a level of success and they want to take a step back from the business. They are trying to figure out how to do that because the business has really served the purpose of providing them income over the past 15, 20, 30, 40 years. That has been the primary means of income for their family. Now they recognize that they’ve got all their net worth tied up in these businesses. For estate planning purposes and various other reasons they need to diversify their net worth out of the single company. To accomplish that, there has to be a liquidity event. Money to facility the liquidity has to come from somewhere.
They can always sell the business to their kids or their employees, and take a seller’s note but that doesn’t provide them any actual money. That is just a synthetic transaction and the vendor is still only getting money out on an annual basis from repayment and income on the note. If they want an actual liquidity event, they have to bring in an outside investor. That is where the private equity groups are, by far and away, the best solution for the business owner who is looking for liquidity event…
Read the full response here.