Heartland Business Transitions, Inc. provides intermediary and investment banking services for the critical transitions faced by businesses – mergers, acquisitions, business sales and ownership successions.

CASE STUDIES

Recapitalization for Future Growth

Critical Takeaways

  • Heartland Business Transitions works to meet all of your goals, not just price. In this case the best partner for future growth was just as critical.

  • Virtually every deal will hit detours on the way to a close. Heartland Business Transitions is the best navigator to ensure that any detour leads back to your planned destination – a deal that meets your needs.

The Situation

A home health care agency sought out Heartland Business Transitions to assist them in finding a partner to recapitalize the company and position them for growth. We anticipated that the deal would close simply and rather quickly because the business was solid and there was tremendous acquisition activity in the home care industry. Unfortunately, the deal did not close as easily as expected because of various unforeseen internal and external factors.

Approach

The company was taken to market in June of 2006 anticipating a quick close but due to a number of complications that arose post-LOI, it did not close until May of 2007. The first issue we encountered came in the form of an accountant that provided incorrect numbers. The accountant supplied incorrect financials to our client that resulted in overstating EBITDA by $336,000 and the gross margin by 4%, reducing it from 22% to 18%. This failure derailed the initial deal terms with the buyer and required a renegotiation of the new deal terms, further slowing the close.

The accountant’s error and the seller’s minimal financial expertise meant that Heartland Business Transitions was forced to do a number of tasks. We had to identify the flaw in the accountant’s numbers while ensuring that the buyers realized that the flaw was a function of the accountant’s work and not potential fraud on the part of the seller. Further, it meant that we had to comfort the buyer that the business was sound while negotiating a new deal structure and educating the seller that the reduction to the deal price was nonlinear due to the reduction in the EBITDA and gross margin.

The second issue was that the buyer required some extra guidance. Our client was a state-regulated company, and the buyer needed to be educated about the nuances of buying such an entity. In addition, the buyer and its advisors did not recognize the seller’s tax status until the night before the first scheduled close. This almost resulted in the end of the second deal structure. Instead we had our client take extraordinary steps to formulate a holding company and a transfer of interest to preserve the deal, but this delayed close by an additional two weeks.

The final issue that was faced during the deal transaction was navigating the complex structure of the deal itself. These complexities came from the fact that the sellers were recapitalizing rather than selling and that there was a combined securities issuance and purchase agreement that impacted reps and warranties. There was a management agreement by the buyer that impacted the sellers as members in the new company. Most importantly, there was an operating agreement that had a major impact on the total value of the deal for the sellers on top of the usual implications of having employment agreements and financing. Only through our experience and proficiency was this complex deal able to be structured.

Results

We sent out 300 CAs, received 53 signed CAs back and negotiated with a total of seven buyers. Our ability to create a limited auction while finding solid potential buyers was key for this deal. The company was sold for a significant premium over our initial valuation and presented the potential of more upside value with a future sale.

The company, under the new partnership, has now expanded throughout the Midwest. It was named by Inc. Magazine as one of the fastest-growing private companies in the United States.

Without Heartland Business Transitions’ services, the clients would not have been able to negotiate and successfully close this transaction. If the sellers had attempted to sell their company on their own, any of the issues above could have killed the deal.