Rolling equity sounds great, but it could backfire. Learn from Matt Matros' experience and protect yourself in private equity deals.
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This episode is definitely worth a listen. Matt’s story highlights several key issues that my clients have dealt with over the years. First, it demonstrates the importance of understanding your exit options and recognizing which ones your specific industry and business structure lend themselves to.
Matt’s valuation for Protein Bar was $44M, with $15M of that considered post-money; and his exit was to a private equity firm with 60% of the proceeds paid up front and a 40% equity roll.
Understanding what makes your company valuable to a potential buyer and what multiple your business will garner is essential information, and you should work to understand those data points immediately.
Feel free to use the link at the bottom of the blog to complete your Pre-Score Assessment and better understand your readiness and exit options.
It is never too early to start, and you want to be ready when your first “inbound request” comes.
Some other key points to pay attention to and their time stamps are provided below:
6:15 – Why raise capital?
8:35 – Understanding the J-Curve
9:15 – Why Private Equity?
11:35 – The Best Time to Sell
13:30 – Vetting PE Firms
The A-hole Test
Their Playbook
Mutual Vision
24:00 – Rolling Equity – A Cautionary Tale
26:55 – “I should have sold the whole thing…”
27:45 – The implications of being intricately involved in the business
31:30 – Getting fired from your own company
39:45 – Risks of Liquidity Preference and Dilution
42:50 – The luxury of hindsight!
About this Episode
Matt Matros built Protein Bar from a single smoothie shop into a fast-growing chain. In 2012, private equity firm L Catterton came knocking with a deal valuing his company at $44 million. Matt decided to roll 40% of his equity, expecting it to grow even more.
In this episode of Built to Sell Radio, you discover how to:
Navigate the risks of rolling equity: Learn why Matt now regrets rolling equity and how the liquidity preference given to investors could leave him with nothing.
Understand the implications of a liquidity preference: Find out how the investor’s preference means they get paid first, and why this can wipe out the value of your remaining equity.
Avoid common pitfalls in private equity deals: Get insight into the clauses and terms you need to watch out for when considering rolling equity.
Listen to the episode to hear Matt’s eye-opening story and his advice on how to protect yourself when selling to private equity.
About Our Guest
Matt Matross
Matt Matros is a serial entrepreneur with a notable presence in the Chicago food and beverage industry.
He founded Protein Bar and Limitless Coffee, aiming to offer healthier food and cleaner coffee options.
He’s also involved in various entrepreneurial ventures, providing mentorship and acting as an investor or advisor.
Matros believes in creating products that fulfill a consumer need, emphasizing the importance of a brand promise and differentiation in building a brand.
Definitions
Due-Diligence: This is a comprehensive appraisal of a business or investment undertaken before a merger, acquisition, or investment. It seeks to validate the information provided and uncover any potential risks or liabilities.
Earn-out: This is a financing arrangement for the purchase of a business, where the seller must meet certain performance goals before receiving the full purchase price. It reduces the buyer’s risk and aligns the interests of both parties post-acquisition.
J-Curve: In business terms, think about when a company spends a lot of money upfront—maybe on new equipment or marketing—which initially seems like a loss. But then, this investment pays off big time, leading to much higher sales or profits than before. That initial dip and sudden rise in performance is what we call the J-curve effect.
Letter of Intent (LOI): This document outlines the basic terms and conditions of a deal before a formal agreement is drawn up. It serves as a mutual commitment between the buyer and the seller to move forward with the transaction on the agreed-upon terms.
Liquidation Preference: Let’s say you’re at a party, and everyone at the party has chipped in to buy a pizza. But before the pizza arrives, the party gets cancelled. Now, you’d want to make sure you get your share of the money back that was collected for the pizza, right?
In the world of business, a “liquidation preference” is a bit like that. It’s a rule set in a contract that says who gets their money back first if the “party” (in this case, the company) has to shut down and sell off everything it owns.
Usually, this rule is set up to protect the people who took the biggest risk by investing money into the company. These folks usually own something called “preferred stock,” which is a special kind of ownership that comes with some extra privileges. One of those privileges is often a liquidation preference.
So, if the company goes under or is acquired, the people with the liquidation preference (usually the investors or preferred stockholders) get in the front of the line to get their money back. They get paid before anyone else, like employees who own regular shares (“common stock”) or lenders who the company owes money to.
In simple terms, a liquidation preference is like a VIP pass that ensures you get your money back first if a company has to shut down or gets acquired. It’s a way to protect the investment of people who put in money, often at the early stages when the company is most at risk.
Are you personally ready for what should be the happiest day of your life?
By analyzing 40,000 business owners and conducting hundreds of in-depth interviews with owners who have recently sold their business, we have determined that there are 4 major drivers that lead to an exit without regret.
Future Vision: Why do you want to exit your business? What do you plan to do after you leave your business?
Personal Detachment: How attached are you personally to your business? Have you built a fulfilling life outside of your company?
Team Involvement: Have you considered how your employees will be treated when you exit your company?
Structuring Flexibility: How much is your business worth to you? What is your bottom line? Have you considered the practical financial questions surrounding your exit?
Click the link below to take your 8-minute, 12-question PreScore assessment and take the first step toward making a profound impact on the second half of your life.
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