What happens when you’ve found the perfect target, but that target isn’t quite ready to sell? Most firms would simply wait. A new firm called Succession Capital Partners plans to take a more aggressive tact. Rather than sitting on its hands, Charlotte-based Succession will provide consulting services in order to create a proprietary river of family-owned businesses.
Matt Malone formed the firm in May of last year after the Hunt family of Texas disassembled its LBO arm, where he was a managing director. Instead of entering the challenging fundraising market with a first-time fund, Malone started a pledge fund, gathering soft commitments from a group of high net worth individuals for one-off deals.
Succession has yet to close on a deal, but because of its unique strategy that blends operational consulting and investing, the firm has laid a strong foundation for future opportunities.
In what Malone calls “a tweak on traditional private equity,” Succession offers consulting services to companies it hasn’t yet invested in, with plans for the relationship to lead to a deal down the line. The strategy resonates with family-owned companies, he said, because they get to participate in more of the upside in a sale. He was inspired by comments from families of companies he’d sell while investing for Hunt.
“We would buy control of a company but have residual interest from the families,” he said, “but then when we’d exit the company, the families were saying, ‘I wish I had professionalized the business the way “(Hunt) did, and then sold it, instead of having all that money go to (Hunt).'” So Succession does that as a consultant. In the microcap market, Malone said, family-owned businesses can see multiple expansion and increased margins with simple best practices and operational improvements. Some of the companies he’s working with don’t even have budgets, he said.
It sounds a bit like charity work, that’s because it is, but its all in the name of building trust. “Family-owned companies are reluctant to rely on a traditional investment banker or private equity firm,” he said. Succession has gained credibility with the companies it works with, and as a result, the firm has strong proprietary deal flow, he said.
The M&A bubble of 2006 and 2007 put dollar signs in the eyes of many a family-owned business, which is why they aren’t happy to sell at the depressed multiples of the current market. Sellers may be sophisticated enough to know what their company is (or once was) worth, but in the microcap end of the market, their companies are not yet operationally strong enough to command such high prices.
Malone defines microcap as between $25 million and $100 million in revenue, which encompasses 190,000 US businesses. There’s less competition in that end of the market, versus the 10,000 businesses with revenues greater than $100 million.
“My private equity brethren may not like the microcap market getting more and more sophisticated,” he said. But Succession Capital, he said, “gets there early.”