ME415 Nash Engineering: Financing Options

... Merge

Whichever option the family and the board decide on, the company needs the financial resources to tide them over the transactional period. At the time, Visscher&Co provided an overview of financing options

Main Categories

Debt

Bank borrowing

Private/Public placement of debt

Leveraged recapitalisation

Equity (Seeking Investors)

Private equity

Public equity

Management buy-out

Strategic Options

Split-ups / Spin-offs

Dividing the company, spinning off superfluous/non-profitable subsections. Eg. Discontinuing a product line, selling off physical infrastructure etc.

Strategic partnerships (Mergers)

Sale of company

Visscher&Co provided more information on the basic types of equity financing due to its increasing popularity among family companies.

Venture Capital Funds

  • Common among start-ups / companies with proven technology but lacking infrastructure/funds
  • Investors expect high rate of return (up to 50%)
  • Investors want significant control over strategic and policy decisions in the company
  • Investors often prefer early exit
  • High cost high return option

Institutional Private Equity Funds

  • Investors flexible on issues of control
  • Funds allowed to be used to satisfy shareholders (Dividends or otherwise)
  • [As with all equity funds] Does not weaken the balance sheet as bank debt
  • Exit after around five to seven years (via refinancing or buy-back)
  • One time capital solution
  • Single major drawback: funds cannot be used for on-going liquidity programs for family shareholders who wish to cash in stock in the future

Family Equity Funds

  • Usually wealthy families pooling their resources and investing in other industries to diversify from their own family firm
  • Prefer long-term to avoid capital gains tax
  • Can be used as company growth capital as well as long-term liquidity programs for shareholders
  • Flexibility benefits multi-generation companies (liquidation demands spike at each succession of the company)
  • Family equity investors become a long-term financial partner

Mezzanine Funds

  • Least expensive option
  • Lends the company subordinated debt

Debt repayment structure: When a company defaults or declares bankruptcy, senior debt holders and unsubordinated debt holders will be paid in full first. Subordinated debtors are then paid with the leftovers. In the case that the company's full worth is expended on senior debtors, subordinated debtors are not entitled to any compensation at all.

  • Higher interest than bank loans (10%-15%)
  • No principal payment until the end of the loan (preserves cash flow)

Specific to Nash::

9min