The Shotgun Fund

The Shotgun Fund™ jams one barrel, but gets a bird with the other

The Shotgun Fund™ jams one barrel, but gets a bird with the other

July 2002

It has been a quiet year for shotguns, but things are picking up. And there have been some interesting lessons along the way.

A transaction was brought to us just before Christmas. It was a gem of a company where the operator and financial partner were at each other's throats—and there was no shotgun clause.

We tried to entice the financial partner into selling. Instead, they chose to gain control of the operating company by calling a receiver into the holding company. Naturally, the bank got nervous and immediately put its receiver into the operating company.

When we were dealing directly with the financial partner, we valued the business at $X . The day before the bank's receiver went in, we cut our offer by 50%. By the time the receiver got there, we were at 35%.

We did not win the bid. However, the transaction has still not closed. Lawsuits are being prepared. And it's hard to imagine anyone "winning".

Contrast this with a company in the same situation where operating and financial partners were not getting along but they did have a shotgun clause. They fought. They manipulated. They negotiated. They tried to buy each other out. They stopped focusing on the business. Two of the three partners approached us—separately.

In April the operators pulled the shotgun at a reasonable price and the financial partner realized he was best off with the operator taking over. The transaction closed without a hitch. The ex-partners are still talking and the business is prospering.

The lesson is simple: closely held private companies need a mechanism to resolve shareholder disputes. A shotgun clause is not right for all situations, but it is for most.

The lesson for us: avoid shareholder disputes without shotgun clauses.