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.
Some of the exit options available to you are:
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%Enhanced reputation 46%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.
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:
Obviously this list can be extended almost indefinitely.
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.
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.
Back to buyersTo discuss the implications of any of the above CONTACT Ziggy
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