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Showing posts with label Somerset Entertainment debt equity raise capital. Show all posts
Showing posts with label Somerset Entertainment debt equity raise capital. Show all posts

July 20, 2009

Stories of Private Equity

When the announcer yelled out, “The winner of the Media category, Ernst & Young Entrepreneur of the Year—Somerset Entertainment!” Andy Burgess grinned and bounded up to the stage to collect the award.
It all looked so easy to be standing there in a tuxedo waving the trophy, but this moment of appreciation came from painful years of slogging late into the night.
Andy Burgess is one of the owners of Somerset Entertainment, which produces and distributes specialty music to gift stores and other non-traditional retailers using interactive displays where you can push a button and listen to the CDs. They have 28,000 displays in over 18,500 locations that now include mass merchants and specialty stores.
With business and Juno awards filling their shelves, Somerset Entertainment did various acquisitions and moved from $5M in revenues to $11M, until eventually they were achieving $21M in revenues. They bought a distributor and, in 1998, levered up with four flavours of debt: term debt, debt at 17% interest rate, revolving credit, and a vendor take back loan. Then the cracks began to show.
The Buffalo distribution fulfillment center had been shipping comfortably to over 100 different retail points when Andy asked, “Can you do higher volume?” Naturally, they answered, “Yes!” when in fact that was far from the truth. Somerset had been a company with $8M revenues and $2M in EBITDA (earnings before interest, tax, depreciation, and amortization—see glossary) but had grown into the supply chain approach with a distributor turning out to be slow and with the uncanny ability to mess up orders. They would say they had shipped goods—the display case with CDs—and Somerset would then invoice the retailer who, it turnrf out, had not received anything except a bill. It was October—prime pre-holiday selling time with the Christmas season around the corner.

Not good!
American retailers are the toughest sons of guns and were furious at being bamboozled. They told Andy they did not get the goods, but then told him not to bother coming around any more—they were through. Yikes! In one fell swoop, Somerset had gone from being swift deliverers of orders to slow, unreliable duds.
“We hit $36M in sales with $8.5M EBITDA but our debt was at $15M and for the first time, we stressed about breaking covenants. We got a valuation of $15M and, with reluctance, we decided to go with a private equity investment of $21M.”
In hindsight, Andy says getting private equity was good for the owners’ motivation. It took the edge off the worry about money and retirement. “With private equity buying part ownership, we were allowed to take a large chunk out for ourselves straight away but still retain control. I had been working very hard and it was good to get $6M out for the founder and owners.”
The money meant Somerset could pay off their debt straight away and still have $4M to make acquisitions.

Andy says, “With that extra cash, we set up an office in Chicago that has turned out to be the vital springboard into the American market, taking Somerset to the next level. We’ve had a bad year in there, but we did not have to worry about the business blowing up. The peace of mind meant we could focus on battening down the hatches to the storm and finding a new way forward.”
The private equity partners proved to be great sounding boards when Somerset was making acquisitions. The investors were more aggressive in wanting growth but respected Somerset’s decision to step away from some identified targets.
“Also, when we nearly lost a key person,” Andy adds, “The investors did bring him around and get him to stay.”
Andy adds, “When you are an entrepreneur working your butt off, it is great to get that cash pay out as well as have cash to grow the business. With private equity you get the best of both worlds—the cash liquidity without the rigorous scrutiny of the public market.”
“Not every company can go public,” says Andy. “Private equity will transition you.” See if you can go public. Take Andy’s test and put the necessary tick marks next to your chart.
− You are making enough money to pay for public listing and accounting.
− You are profitable.
− You have a strong growth curve for your revenues.
− You have a decent management team.
− You are a good size.
Andy says, “At the time of the private equity deal, we were too small to go public. With private equity investors, we got to retain control and we got liquidity. Private equity took us back from the brink with risky debt and looming covenants. They were the stepping stone to getting big enough until in 2005, Somerset did our initial public offering (IPO). Selling those secondary shares was sweet, too.”
As Andy Burgess stood on the stage and let the applause of the audience sweep over him, it struck him how far Somerset Entertainment had come and what a ride it had been so far.

This is an excerpt from Money Magnet: Attracting Investors to your Business. Read more: