3. Sell the business to another company
Of all the options, this can be the most confronting. Frequently, the list of potentially interested buyers will be the same list of competitors that you’ve spent years challenging in the marketplace. Many owners have spent years believing their competitors have the wrong culture, poor strategy or ineffective execution. Handing the business over to one of these competitors can be too much to contemplate. Just the due diligence exercise of sharing information with several competitors brings significant commercial risks. Opening your books, sharing customer lists and introducing key staff to competitors are not actions that any business owner would happily rush into. The risk that a competitor may look at several of your loyal staff as ‘cost synergies’ to be eliminated may also prove unpalatable.
4. Publicly list the company
A public float or Initial Public Offering (IPO) is not a succession solution. In fact, institutional investors will be very focused on the stability and proven record of the management team. This will likely involve management shareholders being restricted in their ability to sell shares as part of the IPO or in the period afterwards under strict escrow arrangements. In addition, an IPO is not an avenue open to all companies. The public markets require a certain level of scale and sophisticated levels of governance and reporting. Many mid-market companies are not able to satisfy these pre-requisites.
The appetite of institutional investors to support new listings is also notoriously fickle. Public markets refer to the ‘window’ being open or closed when they refer to the current environment for IPOs. At present this window is well and truly closed to all but a very small number of exceptional businesses.
Private equity as an alternative
Private equity (PE) is a term for pools of capital, managed by professional fund management teams, specifically to invest in unlisted companies. Investment criteria differ between PE funds but primarily the focus is on holding equity investments with a view to add value over a three to five
year period. A transaction with a PE firm can potentially answer many of the sticking points with the alternatives for succession discussed above. First, PE funds have readily available capital and are buyers of businesses throughout the business cycle. They are also not direct competitors and the risk of commercially sensitive information being used against your company is therefore significantly reduced. In addition, PE brings more flexibility in the array of solutions available. For example, an owner may choose to sell a portion of the company rather than all of it. Selling a stake in the business can allow an owner to ‘de-risk’ their current financial position while retaining an ongoing involvement in the business through a new or evolving role. This could include a phased succession plan to new management or an ongoing non-executive board role. As well as providing capital for growth, PE funds will bring a deep network of executive talent and significant experience to assist in developing a successful succession solution.
Private equity is also looking to invest in a company as a going concern and so typically not looking to rationalise staff through operating synergies. So the likelihood of major redundancies for your staff is also much lower. In fact, a PE firm will often look to provide opportunities for key staff to participate in the equity upside as a way of providing incentives and a strong alignment with the interests of shareholders. Often all the infrastructure, systems and governance required of a public company may not be in place today. A PE fund can provide funding in a phase of development when the business may not be ready to be publicly listed. The PE investor will also assist in implementing the necessary governance that will be ultimately required for a successfully publicly listing. Accessing PE investment can also assist through delivering external experience and wisdom to assist in taking the company through a rapid growth phase or managing significantly greater scale of operations. This experience may come through executives working in the PE fund, or alternatively from their networks of board executives and professional advisers.
A PE fund will most likely supplement the core skills of existing management. For example, a management team may be highly capable of running the core business but less experienced in making acquisitions and then integrating them. A PE firm is familiar with the process of researching appropriate targets, undertaking due diligence, executing acquisitions and overseeing their successful integration. PE investors tend to have a more flexible approach to how they invest and how a transaction is structured. In exploring the avenues open to you as a business owner, it is well worthwhile investigating whether private equity can assist you in successfully reaching your goals.
