The Succession Fund: private equity financing for succession transactions, management buyouts, and shareholders looking for partial liquidity or wanting to “take chips off the table


Argosy sees opportunity in family business: Succession Fund to form partnerships with retiring owners

Argosy sees opportunity in family business: Succession Fund to form partnerships with retiring owners

By Barry Critchley
Financial Post, December 5, 2000

It has been said that there are three key life phases: Hatch, match and dispatch.

But according to Argosy Partners, a five-year-old Toronto-based entity that is the brainchild of Richard Reid, a former investment banker with Gordon Capital, there are really only two key phases: shotgun and succession.

That's why the gang at Argosy Partners has formed a $20-million Succession Fund to complement the firm's $20-million Shotgun Fund.

"We form partnerships with the retiring owners of Canadian small businesses," says Reid, who launched the fund, in part, because the vast majority of family-run business end up being a one-generation affair. "Studies we have seen show that more than half of the family businesses in Canada aren't passed on to the next generation."

Reid said that the Succession Fund will buy the shares of departing shareholders which provides the retiring entrepreneur with liquidity.

Jim Ambrose, an Argosy director, added: "We want to be partners with the owner-operator provided, of course, we are happy with the new owner-operator. In essence the plan is to foster a partnership with the new owner operator, so that once the entrepreneur is gone, the business, along with its management and key employees, continues on.

Ambrose said the fund -- on which Argosy is the general partner -- will purchase up to a two-thirds stake in a business.

"We are not interested in operating the business but we are interested in sharing control with the operator," Ambrose said, noting once the investment is made, Argosy will seek board representation.

Those directors could come from some of the investors in the Argosy fund. Robert Cross, who worked with Reid at Gordon Capital, is one such investor. Cross is one of seven members on the fund's advisory panel.

Reid added that after Argosy has invested, the fund and the owner-operator will draw up a shareholders agreement. "That agreement will be the same whether we have 30% or 65%," he said. "And the rights are equal for both sides," said Ambrose, who has been with Argosy for the past three years.

The fund will also consider at least two other situations:

  • Shareholders of a family-run business who want to move on. For example, it may invest where one brother wants out, leaving the other brother to run the operation.
  • Where a sale is required, given that the two founding partners are headed for the divorce courts. "In those cases, one party wants cash to fund the divorce settlement."

"We can step in and buy the equity from the departing shareholder, which allows us to form a new partnership with the owner operator," said Ambrose. Reid added that a typical candidate is a family-owned business in the manufacturing, distribution and service sectors.

Candidates probably need at least $10-million in sales and an enterprise value of at least $5-million.

 

So far the Shotgun Fund has made one investment, a $2.2-million stake in a manufacturing company. It has bid, unsuccessfully, on two others, one on a company that is in the distribution business and the other in the hospitality sector.

Ambrose said that Argosy's two businesses are entirely different in terms of activity.

On the Shotgun Fund, he said that Argosy is often reacting to a situation "and we have to do our due diligence and put the legals together in a matter of days."

He said that he expects a slower pace in transactions for the Succession Fund. "But we are equipped to do it quickly and have a yes/no answer within two working days" he said.

Ambrose said Argosy formed the Shotgun fund about one year ago because of a lack of reasonable alternatives for fast turnarounds.

"Chances are that a bank can't respond on a timely basis because of possible conflicts or the need to obtain more information before making a decision," he said.

Reid referred to the process that landed the Shotgun Fund its first investment, a company with annual revenues of $25-million and based in southern Ontario.

Reid said that the two partners came to a fundamental disagreement about the way the company's future direction -- after running the business successfully for more than a decade.

Unable to resolve their differences, one partner served notice that he was triggering the shotgun clause in their shareholders' agreement. (The other partner was about to leave for vacation.)

"Within two days we issued a commitment letter and the offer was put back to the triggering partner," said Reid.

About six weeks later the transaction closed.





Email: klar@argosypartners.com



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