Overview:

The shareholders of this oil and gas (O&G) field service company wanted to divest 100% of the company for exit planning purposes. Both were in their mid-fifties and knew the timing was optimal due to the activity in the sector.

Challenge:

The company was established 20 years ago and although successful, had not taken time to consider a succession plan.  There were no current employees who were capable of taking over the management responsibilities for the owner.  The business was highly profitable and had experienced tremendous growth over the past 2 years, but success had created a concentration issue.  It was obvious to all potential buyers that the owner would be a key element in sustaining the future cash flow of the company. As a result, he would likely be required to either retain some equity or accept certain sustainability clauses in the transaction.

Solution:

Affinity Ventures pursued both strategic and private equity group (PEG) buyers. The company was too small to be considered a platform company by most PEGs, but could be a desirable add-on to an existing platform portfolio.  For strategic buyers, the company would be easy to integrate and occupied a desirable and robust niche of the O&G sector. The search for a qualified buyer identified a PEG backed group who had previously purchased a platform company in another region of the United States.  They had been looking for a company in this region to expand their footprint.  However, the recent growth rate and small size of the business made this transaction a challenge because most buyers look for a larger company when considering expansion outside of their existing operations. The solution to limiting risk for this group was a seller note with a one year maintenance earn-out, based on sustaining historical profitability. The owner was also willing to sign an employment agreement to remain the general manager for at least one year.

Outcome:

During the selling process and due diligence, the company continued to grow at an accelerated pace. Affinity Ventures was able to exceed its original valuation range by approximately 35%.  The owner was able to earn 100% of the earn-out and decided to stay on with company for an extended period of time, due to the excellent working relationship they had developed.  The new owners actually helped the seller attain the earn-out, bringing resources for better purchasing and systems that assisting in creating more back office efficiency.