GUEST POST:  Today’s blog is about an interesting private equity structure called, “Minority Equity Buyout”.  We asked Dennis Hinton of the North River Group if he would be willing to help explain exactly what it is and how it is used.  NRG is based in Birmingham, Alabama but invests in owners throughout the Southeast who are looking to take some chips off the table, but continue to work in their business.

Q: What exactly is a “minority equity buyout”?

A minority equity buyout is an investment where a business owner sells a minority equity position (less than 50%) in his or her company.  This investment is not to be confused with a “minority growth equity” investment where the invested capital goes onto the company’s balance sheet to fund growth.  Our capital is used for shareholder liquidity as the companies we invest in generate enough cash flow from operations to fund the company’s growth.

Q: Who is the typical business owner that seeks a minority equity buyout?

Generally, we seek business owner/operators who are typically between the ages of 40 and 60.  This business owner typically has most of his or her net worth tied up in the business, would like to mitigate some of his or her risk by diversifying net worth, but still wants to operate the business.  This is not a retirement vehicle for entrepreneurs.

Q: Why do certain private equity firms want to purchase a minority equity position in a company?

With rare exceptions, in lower middle market companies, the best managers / operators are the entrepreneurs themselves who started the company.  We believe such individuals perform the best when they are majority owner and their own boss.  A+ managers / operators are very difficult to find.  We are fine taking a minority ownership position behind a business owner where we trust his or her character and competency.

Q: What rights does the business owner retain with a minority equity buyout?

  • Majority equity ownership 51%+.
  • Ability to sell 100% of the business at his or her choosing including “drag along” provisions re minority shareholders.
  • Full operational autonomy on day to day business decisions.

Thanks, Dennis, this is very informative.