Not About the Money:
Bringing outside capital into
the family business
Eric Allyn,
Welch Allyn;
Debbie Bing,
CFAR;
The Core Dilemma:
Objectives for the Session
1.
Not about the money…
– Then what
is
it about?
2.
Welch Allyn circa 2014
– Beyond organic growth? If and how?
3.
Choices and trade offs
– What kind of capital, when and how?
– Impact on business, family,
What we hear about seeking
outside capital: A balancing act
between risk and need
We have never depended on anyone but ourselves.”
Organic growth is too slow to stay competitive.”
We don’t believe in borrowing.”
We have a great opportunity if we can invest.”
We could fail.”
We don’t agree about what is needed for the
future of our business.” Our shareholders’ needs might be holding us back.”
Needs Risks
What if we lose our values?”
Capitol would help us grow our business.”
It is too risky to borrow or get investors.”
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Focusing only on the money can undermine family cohesion. But focusing only on risk can undermine the business.
Conversations about outside
capital raise differences that
go beyond the money
•
Different views about
the future
–
What do we really want and are we
aligned?
•
Different appetites for
risk
–
How much is too much, and who is
taking it?
•
Different takes on
legacy and culture
–
Does new kinds of capital compromise
Different views about
the future
Different appetites
for risk
Different takes on
legacy and culture
OUR LIVE CASE:
Welch Allyn Background:
Family and Governance
•
Medical device manufacturer founded 1915.
•
100% family-owned by 56 members of 3G,
4G, and 5G.
•
Conflict in 3G caused substantial shift in
governance model in 2006.
–
Moved from 3G family owner/operator, to
4G as non-operating owners focused on
stewardship
–
Non-family CEO
–
Majority Independent Board of Directors
•
Keep family “drama” out of the business,
while still keeping positive aspects of
family culture.
Welch Allyn Background:
Business Profile
• Extremely vertically integrated developer and
manufacturer of medical devices.
– 2,600 employees worldwide
• $700 million in revenue.
– Geography: 2/3 US, 1/3 OUS
– Products: dominant position in “core” low
growth, small segment products (2/3 of revenue), new products represent 1/3 of revenue with tremendous upside, and tremendous competition
– Consistent revenue growth 1990-2009; organic
and inorganic
Welch Allyn Background:
Business Profile
• Strong EBIDTA.
– Have grown EBIDTA since 2013 through
facility consolidation and higher “performance metrics”.
• Strong cash position.
– Zero debt, with credit facilities in place to
Welch Allyn Background:
Product Offering
CORE PRODUCTS COMPETITIVE, LARGE NEW PRODUCTS IN CATEGORIES
Welch Allyn Background:
2014 Situation Analysis
• US healthcare changes.
– Tremendous consolidation of healthcare:
driving prices and volumes down substantially.
– Peer companies becoming enormous:
Medtronic acquisition of Covidien
– Importance of devices —> Importance of
connectivity.
– Moving healthcare into home.
• International competitors.
• Offshore manufacturer private labeling. – Driving US Price points even lower.
• Organic growth barely able to make up for
Welch Allyn Background:
2014 Situation Analysis
• Business Development Opportunities
– Target properties are extremely expensive:
4x revenue
– Smaller deals: not enough to move the needle
– Strong need for larger, transformative
deals.
• $200 – $400 million Rev Companies—
priced at $500 million to $1 billion.
Welch Allyn would need to consider non-traditional means to finance such a transaction
The need is clear but many
questions remain…
• What sources of capital are available to us
beyond what we have heard about already?
• What are the implications for control
(shareholders and others)?
• How do we take this path and stay true to our
culture?
• How would we (or others in our situation) need to
Family forces/ personal constraints Business tasks/ capital market constraints OWNER’S CONTROL CAPITAL NEEDS SHAREHOLDER LIQUIDITY
Balancing Capital, Liquidity and Control in the Business
Managing capital
and liquidity
Family Wealth Inherited, Developed,
And Maintained In The Family Business To Be Passed On To The Next Generation
• Financial Wealth (Family Shareholders’ Equity)
• Outer Wealth
• Intangible Wealth (Family Traditions,
Stewardship Values) • Inner Wealth
Philanthropy
Real Estate
Operating
Assets Assets Liquid
Financial wealth structure
Family Effect
Maintain Patient Capital Invest In The Family Effect Provide Liquidity Flexibility to Shareholders Strive For Growth
In Shareholder Value
How to maintain
patient capital?
Managing Capital
and Liquidity
Spectrum of Capital & Liquidity Solutions
Control
Liquidity
Valuation
premium 30-50% (10%-50%) discount Most Least Lowest InternalSolutions Solutions Debt Solutions Equity Strategic Solutions
Highest
Public Markets
Managing Capital
and Liquidity
Debt 1. Bank Loan 2. Private or Public Placement of Debt 3. Leveraged Recapitalization Equity 1. Private Equity 2. Public Equity 3. Management / Shareholder Buy-out Strategic 1. Split-Ups and Spin-Offs 2. Strategic Partnerships 1. Dividends 2. Annual Redemption Programs 3. Company Sponsored Loan Programs 4. Family Opportunity FundExternal Capital &
Liquidity Solutions
3. Merger / Sale of Company 5. Internal Recapitalization 6. ESOPs4. Leveraged ESOPs 4. Family Capital Partners “Families Investing in Families®” Internal Capital & Liquidity Solutions
The New Capital Model for
Family-Owned Businesses
Families Investing in Families®
Single Family Offices Family-Owned Businesses A Partnership Of Capital and Values
• Opportunity to partner with patient capital sources that share a long-term investment horizon and an understanding of the family business model.
• Opportunity to address multiple capital and liquidity needs in a
customized investment partnership:
• short-term (provide a measure of immediate liquidity and asset diversification); and
• long-term (align the Company’s future with a capital partner to help achieve shareholder
liquidity, organic growth and provide supportive acquisition financing)
• …without the burden of
intermediate investor liquidity pressures.
Summary Benefits
Long-term, patient partner / Stable equity capital base
Funding both
business growth and family liquidity Flexible—no control requirements High value-added capital partners Culturally compatible partners Participative governance Conservative capital structure
Benefits to Family
Businesses
• Opportunity to become a
value-added capital partner to the owners and managers of growing family and closely-held businesses.
• Opportunity to partner with like-minded patient capital owners:
• long-term investment orientation
• low leverage
• Opportunity to make long-term direct investment and actively participate in the governance.
• Opportunity to co-invest and collaborate with other Single Family Offices.
Summary Benefits
• Trans generational wealth creation
• Partnership with culturally compatible family/
management
• Back to the Roots of legacy business
• Participative investing
• Transparent, long-term investments (No “blind pool” risk)
• “Club Investment” with other families
• Attractive long-term rewards (financial, intellectual,
emotional)
• Partnership Exit
Benefits to
Senior
Bank Debt / Sub-Debt Mezzanine Private Equity Traditional Family Office / Patient Capital Strategic Sale Cost of Capital ◔ ◐ ◕ ◕ ● Pledge of Assets / Financial Covenants ● ◐
n/a n/a n/a
Retention of Control ● ◕ ◔ ◐ ○ Continued Involvement ● ● ◐ ◕ ○ Liquidity Availability ○ ◐ ◕ ◕ ● Valuation n/a ◔ ◕ ◕ ● Value-Added ○ ◐ ◕ ◕ ●
Time Frame 3-5 yrs. 3-5 yrs. 3-5 yrs. Patient / Flexible n/a
Availability ● ◕ ◕ ◔ ◐
Comparison of Options
• Banks lending again • Rates are attractive • Restrictive covenants • Higher cost of capital (mid-teens) • Little, if any, dilution • Board and oversight concessions • Eager investors, a lot of dry powder • Employ leverage • Shorter investment horizons • Like-minded, partnership oriented • Majority or minority investment • Preservation of “Family” heritage • Synergy • Change of control and culture • Little future involvementPrerequisites to Partnership
Implementation
Define growth plan
Address near and long-term liquidity needs
Establish/Solidify family governance
How to find the right partner?
The Right Partner
Cultural Fit Geography “Fit” Business Compatibility Financial Means Valuation
