M&A Imagineer: The Triple 7 Strategy
There may be certain relatively critical suppliers to a particular business, that the enterprise may wish to nurture in order to protect their supply chain (whether domestic, global or both)?? To ensure continuous long-term supplies; being a much larger company, the enterprise could explore the idea of possibly providing a package of funding measures to the supplier in an attempt to strengthen that company’s existing Balance Sheet?
1.????? The most novel of which is that the enterprise “lends” up to 7% of its own net worth via an equity swap (with expert professional help and in accordance with any compliance/regulatory stipulations) with the supplier company.? Providing the financial foundation upon which the supplier can tender for larger value contracts over a longer period – including for other customers.? This is then “repaid” in the future once the supplier itself has matured financially, with a stronger Balance Sheet of its own – that can comfortably (at a pre-agreed time) start to fully discharge the 7% equity swap plus an pre-agreed premium.? Just to be clear the enterprise is intentionally assuming a certain level of risk because, to it, the “investment” is secondary; it is the supplies and strength of the supply chain that is more important.
2.????? To assist further the enterprise provides a mixture of debt and equity finance directly to the supplier: charged at up to 7% in debt interest; and, up to 7% (capped) capital appreciation in the value of the supplier’s enterprise value.
3.????? Any agreement between the parties is to include a legal “option” for the benefit of the enterprise – which at its discretion can decide whether to formally “acquire” the supplier’s business in 10-15 years hence.? In this sense, the debt and equity provided serve as almost a form of partial forward funding, but without the obligation to officially make the acquisition.? Circumstances and the market conditions may change in the future, making the proposed business less attractive to acquire?? In this instance the enterprise effectively (on a win-win basis) negotiates terms that enable the supplier company to takeover any “minority” interest(s)?
4.????? Other creative measures could be taken to assist the key supplier further, such as: payment in advance or with official orders; if an overseas supplier, the encouragement of partial in-house machining facilities with “free issue” locally sourced material supplies (that is, the enterprise provides some physical space and assists the global supplier to manufacturer a few of the most critical components domestically – on a “just-in-time” basis); longer-term supply contracts guaranteeing a minimum level of purchase orders; for large component supplies, full logistical support from shipping to local haulage, and so on… ????
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This strategy would not be applied to all suppliers; only to those that are vital for the enterprise to itself operate profitably and to meet its own immediate commercial obligations.
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Kip
The EBO Guy??????
…Acquiring businesses for employees
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