Rabe's deal represents one end of the spectrum available to business owners in such shirt-sleeve deals: all cash and no stock. Had she known from the beginning that she wanted to stay with the company, that she simply wanted capital to expand, she could have sold The Seedlings for all stock and no cash, ending up with as much as 50% of the holding company. "We can do it the first way, or the second way, or something in between," says Connelly.
As it turns out, Rabe's approximately 3% stake, negotiated when she became president, may turn out to be worth more than her 100% stake in The Seedlings. If the company grows to about $35 million in revenues, as Lepercq plans, it should be worth some $56 million. That makes Rabe's slice of equity worth $1.7 million. Of course, her ownership position will probably be diluted somewhat before AFSC reaches that size, but it's still likely that she could net at least as much from partial ownership in AFSC as she did from complete control of The Seedlings. Had Rabe gone instead for an all-stock deal, a 50% share of AFSC could amount to some $28 million under the same Lepercq forecast.
But will the forecast come true? AFSC has opened up three new Greentree centers, one new Seedlings center, and instituted four more after-school programs. Connelly expects 1989 revenues will exceed $3 million, ahead of projections. Already AFSC is one of the 25 largest companies in the $15-billion child-care industry.
Growth through the shirt-sleeve strategy has a price, though. While you give up the problems of sole ownership, you gain other headaches. Higher debt expenses, for example, will be one reason economies of scale, which are supposed to reduce expenses, may not materialize for a year or two. In AFSC's case, overhead costs have actually risen, because AFSC has installed management information and administrative systems designed to support a much larger organization.
If AFSC's next acquisition could be arranged quickly, The Seedlings and Greentree wouldn't have to strain so hard under the higher leverage and bigger operating systems. But that isn't as easy as it sounds. Last year, Rabe, Hopper, and Connelly spent almost six months arranging an acquisition that would have nearly doubled its size before abandoning the transaction because the candidate didn't live up to its earnings projections.
The biggest risk for business owners, though, probably isn't in how shirt-sleeve deals are executed -- it's in relinquishing control. Carry the acquisition strategy to its logical end, and it's easy to imagine a company that's chock-full of warring egos of former owners.
Also, some entrepreneurs may not enjoy having an investment group as a majority owner. While Lepercq, like most such groups, leaves day-to-day control of the company to the president, disagreements are inevitable. "We talk them through until we reach a consensus," says Connelly. Hopper suggests that the owners of acquired companies define success in measurable terms at the outset. That way, he says, "when subjective relationships have their inevitable peaks and valleys, you have an objective standard that you can look to."
For Rabe, shirt-sleeve capital was the answer, in large part, because she didn't want complete control. "Owning The Seedlings as a single owner was the most intense thing I've ever done. The responsibility never went away. With AFSC I find I feel the same kind of responsibility, but we have national presence and I have the kind of support I need. I know I'm not the only one responsible for making these companies work."
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THE RIGHT STUFF
What investors are looking for
Expansion capital may be just what you're looking for, but is it looking for you? Consider the criteria that Chicago's Golder, Thoma & Cressey, the granddaddy of grow-your-own investing, uses.
* No hair-raising growth rates, thanks. Investors prefer healthy but manageable growth -- between 8% and 20% per year.
* The more the merrier. Lots of companies mean there's lots of acquisitions candidates and, possibly, little serious competition for a major player.
* The right numbers. Do economies of scale -- the magic formula that lowers costs as a company's size increases -- exist? How big are they?
* Fair prices. Asbestos removal, for example, is a terrific business for a consolidation strategy, says Carl Thoma. But not terrific enough to justify what the owners are asking. Golder, Thoma & Cressey likes to pay five to eight times cash flow.
* Talent. The best strategy in the world is useless if investors can't find the managers to implement it. Job requirements: experienced in industry, understands integration process, shares investors' vision.
Golder, Thoma has spent $170 million on consolidation investments, creating regional or national companies in the funeral-home, bottled-water, paging, printing, propane distribution, and food-service industries. While the firm devotes itself exclusively to shirt-sleeve deals, most investment groups do them on an ad hoc basis. Finding such investors takes patience and lots of networking with venture capital and leveraged buyout groups.
