Tip 12 of 12
Consider alternatives outside a traditional sale
When considering an exit, you should consider all options open to you, so that the best exit route can be selected. Selling the business to a strategic acquirer, while a popular choice, is not the only exit route. An alternative exit route may generate better results, albeit over a longer time period, than an outright sale, so time should be taken to consider all options in order to decide what is best for you and your business. Alternatives to a traditional sale include:
1) Sale of a minority stake to a financial investor – Selling a minority stake in your business to a financial investor should unlock capital for private shareholders while enabling you to retain management control of the company. Financial investors have an exit horizon of typically between three and five years, during which time they anticipate that their investment will have enabled the business to grow sufficiently to enable them to realize a substantial return on the investment made. Institutional investors are generally looking to more than double their money over the period of their involvement – which means that your majority shareholding will have appreciated in value materially alongside your investor. However, the investor will want the right to exit at the end of their investment period – which may trigger an exit event – an outright sale or possibly bringing in a replacement investor.
2) Sale of the company to a management buy-out (‘MBO’) or buy-in (‘MBI’) team – An MBO offers a seller a discreet, ‘internal’ transition to the existing management team, who are both familiar with the company and aware of its opportunities for growth. Exiting in this way requires you to have built a strong management team who are already responsible for managing the business on a day-to-day basis. In an MBI, existing management are replaced by an external management team. The two options can be combined in a buy-in management buy-out (‘BIMBO’), whereby a new CEO may join the business working with the incumbent managers and together purchasing the business usually with the help of an external investor.
3) Purchase of shares by the company – Sometimes, a sensible use of your business’s surplus capital at a time may be to purchase or ‘buy back’ its shares. This option may be taken to accommodate a retiring shareholder, enabling them to realize their cash without the company being sold, or to consolidate ownership among key managers. Buy-backs may not always be a favored route as there is always an opportunity cost if the same funds could have been reinvested in the business to support growth. This route is also not very tax effective as the value returned to the shareholders is generally treated as a ‘distribution’ (like a dividend) and taxed as income and not capital gains.
4) Initial public offering (‘IPO’) – A flotation on the stock market can be both financially rewarding for existing shareholders and will allow you to tap into new equity capital to grow your business. However, it can be impractical if you are unable to handle the management and financial burden of building and maintaining investor relations. The cost of an IPO can be prohibitive, both to achieve the float itself and to comply with ongoing stock exchange governance. Lastly, your business needs to be of a scale to attract blue-chip investors which may wish to invest in minimum tranches of $2m to 45m but have their holding represent less than a 10% shareholding.
In summary, if an outright sale isn’t right for you, a Management Advisor at B2B CFO can help evaluate other options. In addition to the options mentioned above, you can structure a deal to pass on the ownership to employees through an Employee Stock Ownership Plan (ESOP). There are also Private Equity Firms that have an interest in Acquisitions, Growth Financing, Recapitalizations, Founder/Owner liquidity and Management buyouts deals in Florida. Contact a B2B CFO Partner to learn more.
Answers to these and many more questions can be found in The Exit Strategy Handbook. See Chapter 1, “Who Needs this Book,” page 14.
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