Frequently Asked Questions
Transition Capital enables business owners of Canadian middle-market private companies to:
• Take significant CAPITAL out of their company, and
• Still retain MAJORITY control of their business
Who is a good candidate for Transition Capital Canada?
An ideal candidate will be someone that is not ready to retire and wants the best of two worlds:
• Diversify wealth by taking a meaningful amount of capital out of their business and redirect it to their personal / family account, but not
impair the viability of their business.
• Raise that capital from a source willing to invest equity in the business as minority stakeholders, enabling the selling shareholder to
continue managing the business much the same as they have done in the past.
Benefits of a minority sale:
• Protection for key management and employees who were loyal and instrumental in growing the business and creating shareholder
• Protection for other key stakeholders that have supported the business from customers, suppliers, service providers and the community
the business lives in.
Can you define significant capital?
$ 10 million to $ 50 million.
What will be the source of that capital?
Proceeds from the sale of a meaningful
minority interest in the equity of your
business to a Private Equity (PE) group.
What are Private Equity groups?
Well established private investment firms,
that control pools of capital (Funds) raised
from Pension Funds, Insurance Companies,
Banks, High Net Worth individuals,
and Family Offices.
What constitutes a meaningful minority interest?
20% to 45% of the ownership / equity of
How does the math work?
- The Enterprise Value (EV) of your Company is a function of its annual proxy of Free Cash Flow (EBITDA) and a multiple of that EBITDA that a buyer is willing to pay. The multiple is principally a function of the industry your company is in, the growth rate of your business and outlook.
- Multiples for private companies are generally in the 4x to 12x range.
Example: A debt-free company generating $7.0 million in EBITDA operating in the manufacturing sector attracting a 7x multiple, will generate an EV of $49 million. Selling 35% ownership of that business will generate proceeds of $17.15 million to selling shareholders.
Is minority ownership sufficient to attract PE groups?
While PEs traditionally aim to acquire 70%
to 90% of the equity of a business, certain
PEs have expanded their investment
parameters to include Minority Investing.
Given the seemingly abundant Private Equity capital and scarce investment opportunities in the mid-market space, why do you need Transition Capital Canada to access these Private Equity groups?
There are well over 100 Canadian, and more
than 6,000 North American Private Equity (PE) firms. Only a small number in the PE community
genuinely want to invest as minority
shareholders and even fewer have a history
of being “Good Partners”. With Transition Capital Canada’s experience in the North American market,
we can source the best PE group that aligns
with your strategic vision and cultural fit.
How does Transition Capital Canada differentiate from external auditors, accounting or law firms, whom may already have developed a good understanding of your business to source compatible Private Equity partners?
The professional firms providing companies
with accounting or legal services may
encounter a few PE deals a year. Transition
Capital and its principals have completed
well over 300 PE deals over a 5-year period,
providing over $4 billion in capital.
What other key items should be considered to ensure a successful relationship?
Documenting the intention of shareholders
going forward including future potential
events that will include further investments
by the PE partner to:
- Support growth.
- Make acquisitions.
- Purchase additional
equity from shareholders.
- Changes of control, or potential exits for all
shareholders, including the sale of the business.
How do business owners partnering with substantial minority Private Equity investors ensure they retain operational control over their businesses?
Business owners need to engage an
experienced Advisor such as Transition Capital Canada to navigate the very specialized process of
identifying and bringing in the right compatible PE partner and ensuring the arrangement is properly documented to ensure the interests of the selling
shareholder(s) are well protected.
What company characteristics make an ideal client for Transition Capital?
Transition Capital Canada targets Canadian mid-market private companies with annual Revenue of $25 million or more, and sustainable annual
Cash Flow (i.e., EBITDA) of $5 million or more.
What other aspects should be contemplated between shareholders?
The establishment of a Board of Directors
whose members / composition will reflect
the ownership structure of the company,
where all major company activities are
reported and approved, adhering to the
Shareholders Agreement, and ensuring all
company stakeholders’ interests are
respected (stakeholders include
shareholders, employees, banks, suppliers,
How do I start the process?
It starts with a high-level conversation,
(preferably ZOOM or Teams) to put a face-
to-a-name, agree that anything said is
confidential, get a brief description of our
respective companies, get some
understanding of what your desired capital
program might encompass, and determine
whether the personal chemistry of our
respective firms / people is a good fit.
What is the key document that will ensure a new majority / substantial minority partnership will work for all parties going forward?
The principle document will be
the Shareholders or Partnership Agreement
that will describe in detail the major
elements of operating the business going
forward. Significant areas needing
majority / minority partner support will
- Senior management composition.
- Operational direction.
- Banking arrangements.
- Meaningful capital
investment (CAPEX) decisions.
- Principle lines of business changes including corporate acquisitions.
- Financial and operational reporting.
- Other meaningful components that will materially impact the business in the future.
What is the difference between using Private Equity and traditional banking for raising capital?
In the context of raising capital:
- A company would first want the raise debt from banks and other credible senior lenders, because it is the cheapest form of capital (Prime + 1% to 4%), but there are limits to the availability of senior debt, constrained by covenants (IE Leverage, Debt Service), (term-specific up to 5-years)
- If more capital is required to fund desired growth, a business could raise junior (Mezzanine / subordinated) debt (Prime + 7% to 12%), but even junior debt has limitations (IE total debt as a % to Enterprise Value) (term specific up to 7 years)
- If more capital is needed (because a business wants to fund growth beyond its ability to raise debt), it can sell equity which is the most expensive form of capital. Equity providers look for an annual return of 18% or more and will realize that return by the sale of its equity at a value (EV) much greater than when they initially provided the equity capital. (no fixed term)
Assuming our first contact leads to a willingness to move forward, what would be next steps?
Transition Capital Canada would circulate a draft Engagement Letter that would incorporate:
- Mutual Non-Disclosure Agreement.
- Description of the Services to be rendered by Transition Capital Canada.
- Terms of the Engagement.
- Potential Transaction Value.
- Fees and expenses in
undertaking this process.
Why should I find an Investor to grow my business?
Growing a business requires expertise and
capital. When available conventional debt is
not sufficient to fund the growth of a
business, an Equity Investor will be
required. For those wishing to raise equity
and not give up Control, Transition Capital
has access and is close to trusted Private
Equity Investors who will bring value and
provide equity in a Minority position to
facilitate business growth.
How can Transition Capital Canada help develop a succession plan?
A Succession Plan usually involves the
transfer of the business (operational control,
equity ownership) to:
- Other family members.
In effect, it is the process of transferring a business from those who have control of a business and material wealth to those who have nominal wealth. Transition Capital Canada has a team of professionals (legal, accounting, tax, estate planning) and specialized Private Equity groups, that will put in place the right ingredients to ensure the successful realization of a desired Succession Plan.