Minority deals as an independent sponsors: where you acquire <50% of the company, leaving the founder with majority ownership.
Pros:
• Discounted valuation due to the lack of control. You might be able to obtain ownership in a great business below fair-market value.
• Strong skin in the game from founder is built in. We always say that the more the seller rolls, the better for alignment, so them "rolling" a majority is obviously the extreme version of that (green light that they're bullish).
• Your investment should mostly be used to accelerate growth (as opposed to paying out the founder).
Cons:
• Awkward to charge a mgmt fee, since the founder remains full-time involved and in control. You can maybe agree/negotiate a fixed quarterly fee as a compensation.
• Deal ought to be all-equity. If founder wanted debt, (s)he might as well do a dividend recap. So your investment must mainly come from equity.
• Lack of control is structurally difficult for any PE investor, let alone an IS who raises capital on a deal-by-deal basis.
Tips:
• Insist on put options.
• Negotiate veto rights related to major decisions (balance sheet, cap table, change of control, etc.).
• Include structural protection: first money in (yours), should be first money out (preference).
Sourcing: Since bankered deals are almost always majority, minority recap opportunities are typically sourced proprietarily.
Thanks to Dan Kipp who recently hosted a workshop in Miami on this topic.
Case study: Neel Bhargava in Episode 12 of Minds Capital Podcast.
