TRUE GRIT

Overcoming two disastrous deals would put any entrepreneur to the test, but Brad Nathan’s private-equity firm has survived

The past few months have been more than kind to Brad Nathan: his Toronto-based private-equity firm Lynx Equity snapped up a handful of companies, including socialmedia marketing developer Majestic Media, and secured another round of debt financing from TD Bank. But never mind the latest flurry of activity. For Nathan, just to be in good standing with investors and financial institutions at all is a feat in itself, after two disastrous transactions left him with millions in debt and tainted his business reputation.

Back in July 2000, his first venture, merchant bank Succession Capital, made its first deal, buying a seemingly steady fire-sprinkler business for $3 million, only to discover its owners had misstated its financials. The company, Control Fire Systems, was selling inventory it was holding for a client and racking up sales, but didn’t record the liabilities. “I bought a business that was losing money that I never would have bought if the financials were done properly,” he says. Nathan went from being worth nearly $4 million at the age of 30 to being saddled with a nearly equivalent amount of debt a year later. “Instead of making money, I borrowed money from friends and family... It took years to recover.”

Nathan remortgaged his house and sold nearly all his possessions to keep the company moving as it faced a massive funding capital shortfall. “All of a sudden, it becomes harder to raise money, and my whole business is based on raising capital,” he says. He met with each of Succession’s roughly 30 investors to assure them he was doing everything he could to get them their capital back. He told them the truth about what happened. He cleared out his RRSPs, remortgaged his house and invested the money in other businesses to build them up and pay back his investors.

It took a decade for Nathan and Succession Capital to recover, and pay people back either in cash or equity. But Nathan in 2007 decided to launch Lynx Equity as a new venture that could operate without the baggage-laden legacy that Succession carried. “It was a clean fresh start, of sorts, that Succession owned a piece of,” Nathan says. “And Lynx was able to go out to get capital from fresh sources, and wasn’t hindered from a messed-up balance sheet.”

In 2009, however, Succession entered another bad deal — buying an airport security business called Secure Solutions. The woman who sold the business signed on as president to run the company for Succession, but started a competing business with her husband, despite allegedly signing a non-compete clause, Nathan says. In the end, this new competing business took Secure Solutions’ main supplier and many of their long-time customers. Secure Solutions went from doing $8 million in revenues to just $1 million, and went from making $800,000 a year to losing $500,000 a year, Nathan says. The fallout almost wiped the security company out.

Luckily, Lynx and Succession already had a few “home runs” in their playbook, such as Top Cuts haircutting places and Melon Head, a chain of salons for kids. “Doing a good deal in the beginning made all the difference,” Nathan says. “We were able to survive that second [deal]; we had enough of a base.” But Nathan, again, had to sit down with his investors to assure them he was trying his best to fix the problem.

Nathan is currently suing Secure Solutions and others for roughly $5 million. The case has yet to go before the courts and nothing has been proven. Secure Solutions is still losing money, but it is in a “quasistable” position, and the success of his other companies has helped keep it afloat, Nathan says. Lynx Equity now has a “very, very diversified” portfolio of 27 companies. “Even if our biggest company went bankrupt tomorrow, we can handle it,” he says.

Lynx Equity’s companies are on track to do $175 million in sales by the end of December, and $200 million by the end of March, he says. But he’s now extremely defensive when entering new deals. “We spend a lot more time with a person who we’re buying a business from,” he says. “If we get any kind of inkling that reminds us of anything we’ve seen in the past, we jump ship.”