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 operational and 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.
- Raise that capital from an equity source that is willing to invest equity in the business as meaningful 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:
- Ensures that the company you built, managed, and drove to success, continues to flourish and expand in the future.
- 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?
$ 5 million to $ 25 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 proven private equity (PE) investor.
What are Private Equity, (PE) 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 100% of the equity of a business, Transition Capital brings private equity sources that focus on Minority Investing.
Given the seemingly abundant amount of Private Equity capital and scarce investment opportunities in the Canadian mid-market space, why is Transition Capital most reliable source of private equity, especially in a minority divestiture?
There are well over 100 Canadian, and more
than 6,000 North American Private Equity (PE) firms. Very few in the PE community
genuinely want to invest as minority
shareholders and even fewer have a history
of being “Good Partners”. Transition Capital equity sources have a reputation for being fair, honest, and ethical team players that look to align with your capital requirements, strategic vision, and cultural fit. 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 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, with the assistance of Transition Capital, need to spend meaningful time on due diligence to ensure that all parties are compatible, have an alignment of interests, and that the arrangement going forward is properly documented to protect the interests of all shareholders.
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 $3.0 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 to fund “money-out” capital requirements, such as dividends / shareholder distributions, there are generally 2 ways to raise that capital:
- Raising equity through the sale of shares of the Business imposes the least on-going financial burden on the Company, as there are no servicing requirements or maturity.
- Equity derives its repayment of capital and any upside, from the proceeds of a future sale of that equity, at then Fair Market Value.
Bank Financing or Senior Debt
- Leveraging your business by increasing its DEBT to fund a shareholder distribution is the cheapest form of capital (Prime +1% – 4%), but there are limits to availability:
- Senior debt is constrained by covenants (IE Leverage, Debt Service, limits on Debt as a % of Enterprise Value (EV) ETC.).
- There is also a requirement to service senior debt with regular payments of principal and interest.
- There is a MATURITY (usually 5 years) that requires full repayment of principal
- Banks and Senior Lenders generally prefer to see senior debt used mainly to finance Working Capital, provide liquidity, fund Growth (CAPEX), ETC., and not shareholder distributions.
Assuming our first contact leads to a willingness to move forward, what would be next steps?
Transition Capital Canada will circulate a draft Engagement Letter that will incorporate:
- Mutual Non-Disclosure Agreement.
- Potential Enterprise Value (EV) ranges and the minority equity interest % being contemplated.
- Description of the information requirement for detailed due diligence that would normally be included in a comprehensive Confidential Information Memorandum CIM.
- Critical Path/process timing.
- Description of the Services to be rendered by Transition Capital Canada.
- Terms of the Engagement including period of exclusivity, fees, and expenses in undertaking this process.
What if our company owner(s) is interested in taking money off the table but the timing is too early? Is there an interim step before a full-blown capital raising program?
Transition Capital provides a mentorship program to help business owners and their management become familiar with the concept of selling meaningful minority equity to a PE and its various implications. This would include:
- Help owners and their companies gain a full understanding of the minority buy-out/ private equity sale process.
- Provide an appreciation of Enterprise Value (EV) and likely range in the market.
- Understand the task ahead for shareholders and their company in preparing for a minority sale.
- Outline what company information will need to be assembled in creating a comprehensive Confidential Information Memorandum (CIM)