Management Buyouts More About Confidence and Skill Than Capital
Want to know how important good management is in raising capital? Listen to the story of Fernando Niebla.
Two and a half years ago, Niebla and a team of his fellow managers at a Santa Ana defense contractor scraped together $500,000 and, backed by a Newport Beach private investment company, raised another $3.5 million to buy part of their company.
They employed 40 people when they started out, and they expected to turn $10 million in revenue their first year. But they did so well that, after only one year, they undertook a second round of financing, this time raising $9 million to finance an acquisition campaign. Now their company, Infotec Development Inc., operates in eight states, employs 250 people and will take in about $35 million in revenue this year. Niebla hopes to do a third round of financing for more acquisitions in the coming months, so continued growth looks likely.
Investors call what Niebla and his team did a management buyout, and the key to their deal, as is true of any management buyout, wasn’t the money Niebla and his colleagues scraped together. It was their skill as managers. Indeed, they won the backing of investment capital for their buyout not because they had a lot of money to toss into the deal, but because they knew how to make the business grow.
An electrical engineer, Niebla came to the United States 30 years ago from Sonora, Mexico. He holds a bachelor’s degree from the University of Arizona and an MBA from USC.
For years, Niebla worked for Rockwell International Corp., running sophisticated satellite-tracking computers. In 1979 he and some partners founded a company in Santa Ana selling similar services to the federal government. By 1995 the company employed 800 people and turned $135 million in revenues annually.
By then, however, Niebla and seven of his managers, having had their fill of defense-industry downsizing, were itching to see if they could make their expertise profitable in mainstream commerce. Specifically, they wanted to buy out a growing division that trained computer engineers to keep them abreast of changes in technology.
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Their best bet was a management buyout. As described in this space last week, a buyout would allow them to take control of their business even though they didn’t command a lot of capital on their own.
As a founder of the original Santa Ana defense contractor, Niebla had $1 million in equity in the business. But as any business owner knows, equity is one thing, cash another. Among them, the other seven managers commanded only $500,000.
That, however, was enough for Niebla and his managers to get the backing of Marwit Capital, a small investment firm in Newport Beach that has invested $24 million in 15 middle-market businesses in the last two years, about half of them management buyouts.
To the $500,000 pooled by Niebla’s managers, Marwit Capital added $1.5 million of its own money in a layer of subordinated, or unsecured, debt. Niebla rolled over his $1 million in equity in an arrangement giving Niebla 50% of the new company’s stock and his managers 25%. Marwit Capital held warrants to buy the remaining 25%.
Marwit also arranged for an additional $2 million in secured working capital from Silicon Valley Bank, an aggressive lender that specializes in financing growth companies.
In short, the deal gave Niebla and his managers majority control of a company with good chances of making the transition from defense work to ordinary commerce.
“I already owned a big chunk of the original company,” Niebla said, “so in essence, what we were trying to do was buy out my other partners.
“Personally, I was at a stage in my career where I was more interested in the commercial prospects of our training division. I had worked under federal contracts long enough, and my management team and I wanted a more focused business.”
The key, as he discovered while negotiating with Marwit, was his team’s management expertise, not how much money they had, Niebla said.
“Really, there were no big obstacles to overcome. We prepared and presented a business plan that focused on growth and profitability. Marwit Capital took some time to analyze it, and then they came back with a proposal that was very close to what we ended up with.
“The negotiations centered around the buyback options for the warrants that Marwit Capital took. We wanted to be able to buy back some of the equity being committed to Marwit if we performed. We hope to do that in this next round of financing.
“But the driver to the deal was that we had a committed and experienced operating team with $500,000 of our own money to put into the deal. That made our story very credible,” Niebla said.
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For its part, Marwit Capital likes Infotec Development so much that it expects to participate in the third round of financing too. Infotec occupies a good niche in the burgeoning training field, according to Matthew Witte, a Marwit partner, and it has performed well since Niebla led the management buyout.
“The nice thing about situations like this is that there are a lot of public companies in the training field to look at to see where Infotec should be 12 to 24 months down the road,” Witte said. “So that gives investors confidence.
“But the key is the management team. Fernando Niebla has done it twice now--first with his original company and now with this one. We’ve seen this company through its adolescence and now into its adulthood. We like what we see.”
Freelance writer Juan Hovey can be reached at (805) 492-7909 or via e-mail at jhovey@gte.net
