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What is a Family Succession?

A succession is when a party, person or individual that is involved in a financial agreement is replaced by another. Succession occurs when the originating party becomes obsolete, incapacitated, retired or deceased. In the case of a family succession, the term refers to the transfer of assets, duties or obligations of one individual to a family heir.

A family succession occurs when an individual, due to illness, death, retirement or other reason, transfers his obligations or benefits on to a family member. This change in state may prevent the party from performing tasks and duties set out in the agreement or, in the case of death, unable to collect on the property in ownership. By replacing the former party, the family member assumes all responsibilities and benefits of the relationships and agreements previously established without any interruption of service.

Obviously, family successions are most common for family owned businesses but they are almost never easy because of the emotions and relationships involved. Successions are further complicated when one considers the three main areas that need to be accounted for in a succession plan – management, ownership and taxes. Accountants and lawyers are required to ensure all parties can realize long-term benefits from the succession plan. And in many cases, capital is required to complete a success plan which is often gained through mezzanine debt.

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What is a New Shareholder Buy-In?

As the term suggests, a new shareholder buy-in is when those that are not currently shareholders in a company wish to purchase shares (usually in a significant enough proportion to warrant a shift in control or a shift in the majority ownership of the company).

A new shareholder buy-in is similar to a management buy-out (MBO) if the purchase of shares is being made by current employees of the company being targeted for purchase.

Whereas, a new shareholder buy-in behaves differently if those making the purchase are not currently employees of the company being targeted for purchase. In this case, the new shareholder buy-in is analogous to a leveraged buy-out (LBO).

Most commonly the difference between a new shareholder buy-in and an MBO or LBO is that a partial or minority share transaction is occurring for less than 100% of the outstanding shares. This is the case when an owner or owners have agreed to either issue new shares from treasury or to transfer shares that are currently held by existing owners. If issued from treasury the consideration (often money) paid for the shares would go to the company. In the case of a sale from an existing shareholder to a shareholder buying-in the money would go to the existing shareholder.

Regardless of the employment status of those making the purchase or the details of the share transaction, mezzanine debt is a common source of capital for those wishing to make a new shareholder buy-in.

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What is a Management Buy-Out?

An MBO, or management buyout, is when the control and ownership of a corporation is taken over by its existing management team. A Management buyout is similar to any other type of acquisition or take-over only, in this case, the take-over is from within by existing employees of the business. A management team will have a deeper understanding of a corporation’s inner workings and operations that can be of a significant advantage when competing with other potential buyers.

There are two primary ways of financing a management buy-out. One option is through debt financing. In this case, the management team will approach a bank who may lend them the required capital. If a bank is unwilling to lend the management team the necessary finances, private equity sources may be interested in backing the team. In this case, the management will continue to operate the business on behalf of the new equity partners.

A management team may be willing to finance the buy-out through personal financing or by borrowing against personal assets – such as real estate. However, it is rare that the management team will be able to raise enough private capital if the corporation being bought-out is of a significant size. They may in fact consider this strategy in order to gain at least a small percentage of the ownership and thereby benefit from a future rise in the corporation’s market value. If they are confident enough that, under the former leadership, the corporation was under-performing, then owning a piece of the equity could, in the long-run, be extremely valuable.

In cases where manager do not have enough personal financing and the banks have been unwilling to support them, management teams have often used mezzanine debt as a source of capital to fund the MBO.

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What is a Recapitalization?

Recapitalization is when a corporation, motivated by a fall in its share value, implements a financial strategy to change its capital structure. In the event of a fall in share value, a corporation may issue bonds to raise funds and then use those funds to buy back its own shares. This can also be considered a leveraged buyout. Other examples of recapitalization include leveraged recapitalization and nationalization.

Nationalization is when a country, as opposed to a corporation or private individuals, purchases a significant interest in a company thereby acquiring a controlling interest. The corporation is said to become nationalized since it now falls under the control of a nation.

A leveraged recapitalization is when a corporation issues bonds as an instrument to raise cash funds. Those funds are then used to purchase back shares that have been previously issued in an attempt to reduce the amount of equity in the company. The reason for applying such a strategy may be to help boost the company’s stock value in the event of a weak market or to simply take advantage of low stock prices and thereby reserve those stocks for future capital requirements.

Mezzanine debt is a common source of capital for companies that wish to undergo a recapitalization.

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What is a Consolidation?

Consolidation, as it is used to describe a corporate strategy or business activity, refers to the amalgamation of several smaller entities or businesses into one larger organization. Consolidating is similar to mergers or acquisitions as they are both the act of combining various corporate entities and are executed for similar reasons. The primary difference between a consolidation and a merger would be the number of businesses involved as well as the relative sizes of those businesses prior to forming the new structure.

Consolidation may also be referred to as amalgamation and comes in several forms. A statutory merger is when the acquired company’s assets are liquidated into the surviving company. A statutory consolidation, on the other hand, is when an entirely new company is formed from the two pre-existing corporations none of which survive the consolidation. A stock acquisition is a type of consolidation in which over 50% of the common stocks are acquired by the purchasing company yet the acquired corporation survives the transaction. In an amalgamation, only the purchasing company survives.

Consolidation also refers to the accounting process encountered during such transactions. In the process, financial statements of the corporate entities are aggregated into one consolidated account. For tax purposes, the group of corporations is considered one entity. Mezzanine debt is a common source of capital for a consolidation.

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