Turnaround club deals: buying from tired owners
Built on Chapter 12 of The Single Family Office by Richard C. Wilson. Full chapter text: FamilyOffices.com.
Some of the best club deals I have seen start with someone else's frustration. A private equity fund has held a company too long. The fund's investors want their money back. The owner needs a buyer with more patience. That is where a family office with operating skill can shine.
Why tired owners sell
Private equity funds run on a clock. When a portfolio company misses its targets year after year, the fund's own investors start pushing for an exit. At that point the fund may accept a fair price just to close the chapter.
Founders can be motivated sellers too. Some are tired, some want to retire, and some have no family member ready to take over.
Many families I know look for exactly these situations. Motivated sellers and long time frames are a natural match.
A typical case
A pattern I have seen many times goes like this. A well-known consumer brand was sold to a private equity firm at a strong price. Years later, after new managers and new products, it still is not making money. The fund wants out.
A family with deep operating experience looks at it and sees a fixable business. It believes it can return the company to profit within a few years. But the check is larger than the family wants to write alone.
So the family forms a club. It acts as lead investor and brings in other families and a few institutions as mostly passive partners. In a perfect world, the lead family would own it all. The club lets it take on a deal it could not otherwise swallow.
What the lead family brings
In a turnaround club, the lead's value is operating skill. Passive partners are betting on the lead's ability to fix the business, not just on the price.
That means the lead should show partners a clear plan before closing. Which costs will change? Which products will be cut or grown? Who will run the company? How long until it should be profitable?
What partners should check
Partners in a turnaround club should look hard at the lead's track record with similar businesses. They should also check how the lead is paid. A fee or extra equity for the lead is fair when the work is real, but it should be tied to results.
Partners should also agree in advance on what happens if the turnaround takes longer than planned. Will members add money? Can anyone force a sale? These questions are much easier to settle before closing.
Why families fit this work
Families have three edges in turnarounds. They can be patient, because they are not answering to a fund clock. Many have run businesses themselves and know how to fix operations. And they can move quietly, which helps when a struggling company's customers and staff are already nervous.
Where these deals go wrong
Turnarounds fail for familiar reasons. The lead underestimates the problems. Partners lose patience at the first bad quarter. Management stays in place when it should change. Or the club runs out of money for the fix.
Most of these can be headed off with honest diligence, a written plan, a reserve for extra capital, and partners chosen for patience as much as for money.
What to take from this
- Look for motivated sellers, including funds near the end of their clock.
- Lead with operating skill, and show partners a written turnaround plan.
- Tie the lead's extra pay to results.
- Set aside extra capital and agree on follow-on rules before closing.
This page is general information, not legal or investment advice. Speak with qualified counsel before forming any investment club.
Questions and answers
Why would a private equity fund sell to a family office? Its investors may want their money back, and a family can offer more patience.
What does the lead family bring to a turnaround club? Operating skill and a clear plan to fix the business.
How should partners judge the lead? By its record with similar businesses and how its pay is tied to results.
What usually causes turnaround club deals to fail? Underestimated problems, impatient partners, and too little reserve capital.