Minority, Control or Majority? Raising Equity for Buy-and-Build Platforms

Langdon Capital is currently mandated to raise circa USD 15 million in equity for a US independent sponsor funding a buy-and-build platform in the US healthcare sector. The capital funds the first two acquisitions, which total circa USD 15 million of revenue and USD 6.5 million of EBITDA. There is a further eight acquisitions in the pipeline, representing a further USD 29 million of combined EBITDA bringing group EBITDA to USD 35 million in approximately 12 to 15 months.

The Day-1 structure

The economics of the initial platform, at completion, were straightforward.

Uses of funds

• Acquisition price: USD 46.5 million

• Transaction costs: USD 2.0 million

• Total uses: USD 48.5 million

Sources of funds

• Senior debt: USD 25 million

• Seller rollover equity: USD 13.8 million

• New equity investor: USD 9.7 million

• Total sources: USD 48.5 million

At an acquisition price of USD 46.5 million against USD 6.5 million of EBITDA, the platform was being bought in at roughly 7.2x — a sensible entry multiple for a buy-and-build, where value is created by acquiring smaller businesses at modest multiples and re-rating the enlarged group over time — “multiple arbitrage.” The financing itself was well balanced: meaningful seller rollover (aligning the vendors to future performance), a viable tranche of senior debt, and a new equity cheque to complete the capital stack. The business case was sound. The problem was never the asset. It was the way the equity was initially offered.

The opening offer: 15%, and no control

The sponsor’s initial approach to the market was to offer investors a 15% minority stake with no control in exchange for a c.$9.7m equity injection. On its face, that can look attractive to a founder: keep control, sell a slice, bring in capital. To an institutional equity investor, it read very differently.

The feedback from PE funds was that they could not write a cheque that represented such a high portion of day1 cash-in and take no control.

One fund set out its reasoning with clarity:

• A day1 acquisition price of USD 46.5m minus USD 25m in day1 senior debt leaves USD 21.5m in implied day1 equity value, of which a USD 9.7m equity injection represents 46%.

• Injecting almost 50% of day1 equity value without control is difficult to justify.

Three ways to sell equity

This mandate is an illustration of the three broad postures a business can take when raising equity, and why they attract very different responses.

Minority stake with no control. The founder retains full control and sells a slice of the economics. It is the most founder-friendly structure and, for exactly that reason, the hardest to place with institutional investors writing large cheques. Professional equity investors underwriting millions expect governance rights commensurate with their capital and their risk. Absent a strategic reason to accept a passive position — a trophy asset, a proven serial operator, or a very low price — most will pass.

Minority stake with control. Here an investor takes less than half the economic equity but secures control through governance: use of different share classes, weighted votes, board majority or veto rights, reserved matters, swamping rights, step in rights, drag rights and protective provisions among others. This can provide control to a third party investor where a founder wants to retain the largest economic share.

Majority controlling stake. The investor takes more than 50% and, with it, control. For the investor this is the cleanest position: capital and control move together. For the founder it means accepting a smaller share of a business they may believe will be worth far more — but often a smaller share of a much larger, better-capitalised and faster-growing company.

The art of raising equity is matching your posture to what the market will actually fund, rather than to what you would ideally like to keep.

The pivot

Armed with swift, direct feedback from fund partners, principals and investment directors, we encouraged our client to adapt to the market’s message if they wanted to get a deal done. To their great credit, they moved quickly and pragmatically.

The revised proposition offers the market a 51% controlling stake on Day 1, with a structured path to increase that to 75% in two years as the vendors sell down their rollover equity. Crucially, those step-up options can be agreed today, with pre-agreed strike prices, giving the incoming investor a clear, priced route to a larger controlling position and giving the vendors certainty and a defined exit. Economics and control were realigned so that the party investing the capital held the corresponding rights.

The result

The change in reception was almost immediate. Within a day of updating the market with the new economics, we arranged a meeting between our client and the principal of a sector-aligned private equity fund and his team. The principal — the key decision-maker — showed serious interest and requested further materials to view and a second meeting to keep the discussion moving. Equally, our client showed every sign of wanting to understand the investor’s preferences around taking a majority stake and holding control from Day 1, and of tailoring the deck and model to that end to maximise alignment.

The asset did not change. The pipeline did not change. Only the terms of the equity offer changed — and that was enough to turn a market-wide rejection into investible deal.

The lesson

This is, above all, a lesson in listening to the capital markets and aligning your proposition accordingly. Those who hold the capital hold the cards. If you want capital, be prepared to offer what investors actually want — on control, on governance, on price — and to meet them there. The businesses that grow fastest are not those who steadfastly stick to their arbitrary parameters over pricing from day1 of a negotiation with the capital markets. Rather, it’s those businesses who recognise that at the beginning of their growth journey, they need to be flexible on financing terms, but that the capital itself can be the fuel to boost their growth to higher levels than if they had stuck to cheaper financing. We are connected directly to key decision makers at leading multi-billion £/$/€ institutional investors, including CIOs, partners, MDs, Heads of Direct Lending and Fund Principals. Through us, you get direct market access and feedback quickly so you can adapt to market appetite and your capital raise doesn’t stall.

Q&A: Key terms explained

Q: What is a buy-and-build (or roll-up)?

A: A growth strategy in which a platform company acquires a series of smaller businesses in the same or adjacent sectors, consolidating them to build scale, efficiency and, often, a higher valuation multiple on the enlarged group.

Q: What is an independent sponsor?

A: An investor or dealmaker who sources and leads acquisitions without a pre-committed blind pool of fund capital, raising the equity for each transaction on a deal-by-deal basis.

Q: What is EBITDA?

A: Earnings Before Interest, Taxes, Depreciation and Amortisation — a common proxy for a business’s underlying operating profitability.

Q: What is TEV/EBITDA?

A: Total Enterprise Value divided by EBITDA. It expresses the price of a business as a multiple of its operating profit and is a standard way to compare acquisition and investment valuations.

Q: What is total enterprise value (TEV)?

A: The total value of a business, comprising its equity value plus net debt. It represents what it would cost to acquire the whole company on a debt-and-cash-free basis.

Q: What is equity value?

A: The value attributable to shareholders — total enterprise value less net debt. It is the figure against which an equity ownership percentage is calculated.

Q: What is seller (or vendor) rollover equity?

A: An arrangement in which the sellers of an acquired business reinvest part of their sale proceeds as equity in the acquiring platform, aligning them with its future performance rather than taking all cash at completion.

Q: What is senior debt?

A: Borrowing that ranks ahead of other creditors and of equity for repayment. Because it is lower risk to the lender, it is typically the cheapest layer of the capital structure.

Q: What is a minority stake?

A: An ownership position of less than 50% of a company’s equity. A minority holder may or may not have control, depending on the governance rights attached to the investment.

Q: What is a controlling stake?

A: A shareholding, or a package of governance rights, that gives the investor the ability to direct the company’s key decisions. Control can come from owning more than 50% of the equity or from contractual rights such as board majorities and reserved matters.

Q: What are pre-agreed strike prices?

A: Prices fixed today at which shares may be bought or sold at a future date under an option. They give both parties certainty on the terms of a later change in ownership.

Q: What is sector concentration limit?

A: A cap that a fund places on how much of its capital it will commit to any single sector, in order to manage portfolio risk. A fund at its limit may decline an otherwise attractive deal simply because it is already fully invested in that sector.

Enquiries

For further information, please contact info@langdoncap.com

About the author

Sabbir Rahman is CEO of Langdon Capital. He has held prior roles with Morgan Stanley, Lazard and Deutsche Bank. He has executed over £200 billion in notional value of debt, equity, M&A and derivatives transactions with global corporates, private equity funds and financial sponsor groups.

About Langdon Capital

Langdon Capital raises debt and equity for businesses with EBITDA between £2 million and £20 million from private credit funds, banks, private equity firms, special situations funds, family offices and venture debt funds. We raise capital to fund acquisitions, organic growth and turnaround situations. We hold direct relationships with key decision makers including CIOs, Heads of Direct Lending, Partners, MDs and Fund Principals at leading multi-billion £/$/€ AUM global institutional investors and provide our clients with swift, direct market access.

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