To maximise the outcome of selling your business, it’s crucial that you know the nature of the beast. You must know your buyer, the different motivations that buyers have and what they are looking for. Understanding them will give you the best chance to prepare for the transition and the different structures they require. It will also enable you to align closely with these buyers, resulting in a smoother transition and greater value.
First Things First: Know Your Exit Options
Some of the exit options available to you are:
- Full sale to a third party, with or without an auction
- Selling/transferring the business to family members
- Selling to the employees of the company via Management Buy Out (MBO) or through an Employee Share Ownership Plan (ESOP)
- Partial sale to raise capital (Private Equity or High Net Worth Families)
- Initial Public Offering (IPO)
So What Is Best For Your Business?
According to PWC, an astonishing 95%-plus of family owned businesses are not passed on to the next generation! In fact the majority are sold to a third party, and the remainder simply close their doors and walk away.
Initial Public Offerings may sound great, but unless a company generates an EBIT of greater than $20m pa, then the business is considered too small to generate any interest in the greater investment community by most Investment banks, stockbrokers or other market makers.
Yes, Management Buy Outs can and do work. However, the source of funding is a real challenge; and it is probably only viable with a private equity funder or a high net worth family or individuals standing behind a deal. This is exacerbated by the fact that these deals are often highly leveraged, placing severe stress on the business and management.
The most likely sale is to an independent third party, and the best of these, generating the greatest value, is to a strategic investor. So you know your buyer, let’s review the diverse interests of the different types of buyers:
strategic investors – financial buyers – family buyers – IPOs:
In a Mergers & Acquisitions survey, PWC publishes a table of what potential Strategic Investors look for:
|Access to new markets||76%|
|Growth in market share||74%|
|Access to new products||54%|
|Access to management and technical talent||47%|
|Reduction in operating costs||46%|
|Access to distribution channels||38%|
|Access to new technologies||26%|
|Reduction in competitors||26%|
|Access to new brands||25%|
In the light of the public failure of many large-scale mergers, there has been a greater focus on cultural fit, and this is now becoming a key element in any strategic deal assessment.
Strategic buyers are often in the same or similar industries or parallel industries. They are more likely to pay a premium than any other type of buyer. This type of buyer includes roll-ups and companies looking to bulk up pre-IPO.
Advantages of Strategic Investors
- Mostly an outright sale (although partial purchases with earnouts are not unheard of)
- Possibly the opportunity for the best value
- The buyer typically knows and understands the industry.
Disadvantage of Strategic Investors
- Impact on customer loyalty
- Cultural conflicts
- Sharing of competitive information
- May probe a lot harder and ask for more warranties and guarantees.
This group includes Private Equity buyers, Venture Capitalists or High Wealth Investors and others who manage portfolios of investments.
These buyers tend to be opportunistic although, once they have invested into a sector, they tend to take on the characteristics of Strategic investors.
Financial buyers will not typically make acquisitions smaller than a certain size (say $5m) and are extremely sophisticated in terms of deal structure and diligence. They are also more likely to use leverage in a transaction.
And these investors typically buy into and support management. Their criteria for acquisition are usually specific, such as:
- Not Food or Must be Food
- Minimum hurdle rates of performance (like 20%+)
- Strong Management Team
- The business must be Scalable
Obviously this list can be extended almost indefinitely.
Advantages of Financial Buyers
- Current owners and management may retain an upside potential
- Involvement by management in future direction
- Less business disruption
- Provide financial strength to the business
- The Investors like to invest in growth (not take-outs)
Disadvantages of Financial Buyers
- Ongoing involvement by seller
- Debt causing financial stress
- Financial reporting overload
- Extended due diligence
- Demanding board
Family Transfers or Sales
The advantage – that the business stays in the family – is often offset in the difficulty of transferring control and the “founder” failing to let go. This is often more an estate planning issue than a deal structuring one. There are many stories of families that have been in business for many generations in all parts of the world from Italy and Japan to Germany, the UK and the USA. In Australia we don’t have to look far to find the Murdochs, the Smorgons, the Packers and the Rheinhards, and we continue to be fascinated by their stories. Even with these well-known families, the transfer of assets to the next generation is full of challenges.
Those that are successful worked incredibly hard to ensuring family transfers are smooth and well managed.
Advantages of a Family Sale
- Family members enjoy the fruits of your labour
- May allow involvement of other family members
- Minimal cultural disruption
- Tax advantages
Disadvantages of a Family Sale
- Estate Planning needs
- Pricing and fair value issues
- Salary continuance and earnout issues
- Family interest in the specific endeavour may wane.
Initial Public offerings are a great way not only to grow a business,s but to take some capital off the table. Not surprisingly, the biggest impediment is the inability of many businesses to achieve the critical mass requirements of an IPO. Whilst a smaller listing is sometimes encouraged, most sophisticated investors will consider an EBIT of below $20m pa to be insignificant and too small. The problem is that the smaller the company, the greater the risk. Businesses worth under $1bn are considered “small market caps”.
Subject to a good story and solid profitability, however, IPO’s can be successful. The alternative is to sell to strategic investors that are in themselves listed.
ESOP’s are a good way to incentivise a management team but are limited in their ability to transfer ownership, unless linked with some other process such as a Private Equity acquisition.
Advantages of an IPO
- Can realise some value if not all
- Can provide funding or capital for growth
- Strengthens Financial Position
- Prestige and public awareness
- Ability to attract talent
Disadvantages of an IPO
- Limitation on Founders on realising wealth for a period of time
- Lack of confidentiality: on-going reporting
- Pressure on short term performance
- Cost of going public
- Executive compensation open to scrutiny
- Shareholder liability
To discuss the implications of any of the above CONTACT Ziggy