Generating Enthusiasm for Ownership
Rincon, a $50 million revenue, California-based environmental firm has been a Key Client of AEC Advisors since 2019. The CEO at the time was the first non-founder to run the company and there were signs that ownership transition to the second generation of owners in the company was not going as smoothly as expected.
Among a few key attributes of an operating agreement written by the original founder, the company had a convoluted internal valuation formula that caused share price to skyrocket in recent years due to the company’s stellar performance. The rapid increase in share price benefitted the founders, but new shareholders felt increasingly discouraged to buy shares given the significant financial burden required to become an owner. Management needed solutions to reinvigorate interest to become an owner in the company as well as make the shares more affordable.
Turning Point, Presented with a New Challenge
In late 2019, AEC Advisors built financial models to test the feasibility of various solutions, including changes to the internal valuation formula, restructuring the capital base, balancing mix of cash dividends vs. long-term equity gains, and projecting potential returns on investment.
During this time, the COVID-19 pandemic hit and management immediately needed to pivot attention to keeping the business afloat. To preserve cash, Rincon asked to pause our Key Client retainer. However, given the pivotal moment for Rincon and the need to transition ownership to preserve the viability of the firm, AEC Advisors remained a partner and advisor to management throughout the entire period.
Rincon successfully executed accelerated buyouts of the founders using cash on the balance sheet, followed by splitting the stock and changing the approach to valuation to improve the affordability and attractiveness of being an owner. As a result, demand for shares and performance of the company are at all-time highs.