So at an age when most entrepreneurs intend to get friendlier with their irons, Nicklaus has committed to growing his business. In June, he sold a $145 million minority stake in Nicklaus Cos. to Howard Milstein’s New York Private Bank & Trust. "Our hope is that our company will continue to prosper, and we plan to be involved for many generations to come," says Nicklaus, who works alongside all four of his sons and his son-in-law.

Selling a minority stake to an outside investor while retaining control, as Nicklaus did, is certainly not a new option for business owners. Yet Tim Kelleher, managing director of La Jolla, Calif.–based PCG Capital Partners, which focuses on making minority investments in private companies, says that he’s surprised by the relatively poor awareness of this opportunity. "It’s common that [companies seeking capital] will say to us, ‘I’ve never heard of this before.’" PCG’s clients tell him that their financial advisors more commonly mention selling to a buyout fund, a high-yield bond offering, an IPO or debt financing. "A very common statement we hear from the CFO is, ‘I didn’t know this kind of capital was available.’"

Indeed, data from Thomson Financial shows that over the past decade, minority deals accounted for less than 5 percent of all M&A activity in dollars. Of course, whether an investor takes a noncontrolling stake in a target company is predicated not just on the company’s knowledge of such injections of capital, but also on the investor’s willingness to put up millions in exchange for a subservient voting position. Experts believe that minority investments may become more popular for a number of reasons. For privately held companies, the notion of going public is less attractive today because of regulations such as Sarbanes-Oxley, which have become cumbersome and costly. Moreover, IPO offerings now need to exceed perhaps $100 million for an owner to elicit anything other than yawns from most wealthy and institutional investors.

IPO offerings now need to exceed perhaps $100 million for an owner to elicit anything other than yawns from most wealthy and institutional investors.

Jeff Tognoni, CEO of Indianapolis-based software company Consona, sought additional capital to fund a growth-by-acquisition strategy, but found the public markets repellent. "It’s hell to be a public company today because of all the regulations. It’s just a thankless situation. It’s the reason private equity firms are taking companies private left and right," says Tognoni, who was willing to float 30 percent of his company to raise cash. "Whether you want partial liquidity or you want full liquidity, seeking private equity is a far better route today, we believe, than an IPO." In January 2006, Thoma Cressey Bravo invested $50 million in Consona. Along with its 30 percent stake, Thoma Cressey Bravo garnered a seat on the four-member board of directors.

Hitching the Wagon
Investors’ rising awareness of minority transactions is powered by increasing interest in financial deals. In 1997, 95 percent of the 1,015 minority transactions were strategic in nature, according to Thomson. However, last year, 74 percent of the 607 minority deals that Thomson tracked were strategic. In 10 years, the number of financial deals as a percentage of all transactions has grown fivefold.

Yes, most investors still insist on taking a controlling stake to safeguard their money, but PCG’s Kelleher explains that some investment firms like his have a greater comfort level with noncontrol opportunities. Target companies have proven that they can achieve healthy growth with the original founders at the helm rather than with investors-cum-managers from the outside. Minority-stake investors look for companies that have a strong management team with a positive entrepreneurial bent. "Typically, the deals I have seen where they are minority recaps, they’re backing the entrepreneur," notes Justin Marriott, managing director of Seare Marriott & Co., a boutique investment bank in Richmond, Va., that specializes in mergers and acquisitions. "Many times you are comfortable going in because you want to back this particular management team. I would take a good management team even over the business model," he says. "It’s almost like if that team leaves or doesn’t perform, that’s kind of your investment." Marriott adds that business owners who sense a weak link in their team are best advised to replace that executive before approaching the private equity market, or jettison him and tell investors that he will be replaced after the capital infusion.

Owners who seek funding to cushion themselves and their executive team against a downturn, or to simply cash out, are usually sent to the back of the queue, Kelleher says. He looks for owners who seem hungry or highly motivated, and who express an urgency—and a plan—to aggressively grow. "Frankly, on balance, the guy who has $250,000 in the bank, versus the guy who has $250 million in the bank, might actually stay up a little bit later at night," Kelleher says, though he concedes that some owners will drive at full speed—no matter how much they are worth.

TOP VIEW Business owners who need capital injections, but do not want to give up control of their firms, can seek minority partnerships. Frequently flowing from boutique private equity firms, minority-stake investments can offer entrepreneurs not only the funds they need to expand an established business, but also the expertise and strategic direction necessary to take a company to the next level. However, business owners who choose this path for growth should never assume that they are taking on a silent partner.

Because of the plenitude of private equity money in the market, Marriott explains, the game has shifted to the point where target companies approached by private equity firms seeking a majority interest can bend the rules and respond with an offer for a minority stake. If an investor balks, an owner can hire an investment bank to solicit more offers—or at least threaten to—to show how serious he is about floating a minority interest. "Even if you really like a group and you want to try to figure out a deal with them, I think you’re still better-served by having the threat of a book there that you’re going to take to market," Marriott maintains. "If you are operating one-on-one with this group, you don’t have any leverage to negotiate."

Guided Growth
While capital fuels expansion, many target companies also seek minority partners to help drive a business carefully toward greater success. Tognoni calls this strategy of seeking investors to offer expertise and strategic direction, as well as money, "turbocharging your equity." Tom Severson, Nicklaus’ CFO, sought out New York Private Bank & Trust for just such assistance. "Howard Milstein and his team have a proven track record of building successful businesses. And during the process of looking for an investor, it became clear to us that he and his team are extremely intelligent and creative, and that they would bring much more to the partnership than simply a financial investment. We were looking for a partner that could help us realize the full value of our branded businesses, and also help institutionalize our business so that it continues to grow and prosper well beyond Mr. Nicklaus’ lifetime."

David Kalt, CEO of optionsXpress, an options trading company based in Chicago, completed a minority private equity infusion of some $90 million with Summit Partners in early 2004—largely so he and the other original investors could cash out some of their equity. But he also was looking toward floating a public offering, partly because the higher degree of scrutiny placed on a public company would offer greater peace of mind to his customers in options trading. Summit Partners’ track record impressed Kalt. "At the time of the investment, we had more than 250 portfolio companies, approximately 100 of which had completed IPOs and 80 of which had completed strategic M&As," says Summit’s Susan E. Barr. Kalt adds: "Most of them were minority interest, entrepreneurs who had taken money off the table."

Similarly, when Tognoni brought in Thoma Cressey Bravo, he wanted not only the firm’s capital, but also its extensive M&A expertise. Consona has acquired nine companies since closing the deal. "Rather than go out and try to find the guy who would pay us the most, we were more interested in finding the guy with the best partner [skills and experiences]," says Tognoni, who believes he could have squeezed 5 to 10 percent more from another investor. "We were just not going to try to optimize the last percent out of it. We were more interested in just finding the right partner."

Rules of Attraction
Minority investment does not suit all companies. Before approaching the private equity market, experts suggest that entrepreneurs consider the characteristics that most commonly appeal to these investors:

• Focus on a growth sector and have a proven track record for capitalizing on it. Most minority investors avoid slow-growth opportunities and companies in turnaround mode.

• Boast management teams filled with highly qualified executives who have worked together for an extended period. But the team cannot be so experienced that they might consider retirement anytime soon, at least not until they move the company to its next level.

• Have a detailed business plan outlining how to continue to expand the business—even down to a granular level, such as how many outlets a retail business plans to open within 12 months.

Informed Consent
While an owner who brings in a minority investor obviously retains control of his company, he can rarely avoid involving the partner in his most important business decisions. Seare Marriott & Co.’s Justin Marriott explains that a majority owner cannot ignore the wishes of a minority partner—even if it appears that the owner has the votes to win a boardroom ballot. Typical provisions in a minority investment contract spell out that owner and investors must reach consensus on important choices, such as issuing new shares, borrowing significant sums, bringing on a new partner, acquiring companies or, naturally, selling the business.

A minority investor can often assist in an entrepreneur’s most difficult decision: how and when to exit his company. Dan Reid, national managing principal for transaction advisory services at Grant Thornton, an accounting and consulting firm, explains that owners who have had their wealth tied up in their companies often find that new liquidity can engender desires to sell out completely. "You get that comfort level. While you didn’t want to give up control before, now you understand, ‘Hey, these people are going to do the right thing, my employees are going to be OK, these other investors understand the business, they’re not going to blow it away, and, by the way, I’m starting to enjoy sailing in the Caribbean on my yacht.’"
 
Lee Gimpel is a business and technology writer based in Richmond, Va.