This instalment explores all exit options available to the owner of a business – and a case study to demonstrate the importance of getting it right.
When we start the exit conversation with a business owner he invariably sees the sale of his business to a third party (aka a trade sale) as his only option.
However, there are other options and the ultimate choice must be tailored to the owner’s personal objectives, especially where big sums are at stake.
The morale is to explore your options carefully.
Options other than a trade sale:
- Intergenerational transfer– once owners realise the downside of this option they often decide otherwise, on what might have been an emotive misstep.
- Management buyout – sometimes owners just need to get out of the way to realise the potential of others around them.
- Initial public offering – there are compelling reasons for and against an IPO, that an owner needs to be aware of.
- Merger – not always easy to find the ideal partner, but where one exists a merger may suit the owner’s objectives. Again this can be tricky if values and culture are not aligned.
- Hiring professional management – the owner still shoulders the business risk, however with the appropriate oversight, this is an option.
- Refinancing – leveraging has its risks if the company defaults on covenants, however an injection of capital can be transformational as in the story below.
- Employee share ownership plan – if the objective is to take some money off the table and retain control this can be a good option.
- Liquidation – liquidation in come cases may also present the best option such as where the individual parts are worth more than the sale price of the whole.
Here is a story demonstrating just how important this all is.
A client was selling down his full 30% interest in his company as he wished to retire. A small group of private investors approached my client and the other shareholders with an offer of $8m for his 30%, however the deal fell through due to differences in personalities. A private equity fund with deeper pockets was the eventual buyer at $10.5m , considerably higher than the initial offer. The company secured much needed expansion capital, grew from a single site operation to a global player with almost 20 locations in the space of 3 years, and was then sold for $49m.
The criticality of selecting the right option AND securing the best-fit private equity investor in this story was paramount. My client cashed out for $10.5m and the remaining shareholders saw their investment grow by $10m to $34.3m in just 3 years.
It beggars belief sometimes that I see such large sums at stake and owners don’t explore their options nor seek the right advice. My client in the story above was fortunate to have engaged an external ‘sounding’ board experienced in facilitating him through the various exit options and marrying his business with the best-fit private equity funds.