An entrepreneur can spend a lifetime building a business, and a family business can represent several lifetimes of hard work. But what can you do if there is no one to take the reins? Securing a financial future for one's family is a powerful motivation to sell a business, even for the entrepreneur who would prefer to die with his or her boots on. Moreover, most small and mid-sized companies are worth far more with an effective entrepreneur at the helm than they would be as part of an estate. Hence, succession planning issues are a driving force in the private equity deal community. In this regard, time is a negative factor for the business owner. It is far better to contemplate your options early, and from a position of strength, so that when you are ready to make a decision, you know what the next steps look like.
To potentially maximize the value of your business, and facilitate the investment or sale process, it is essential to assemble an experienced and seasoned team of advisors who can prepare you for the process. Your team can describe in detail the process of taking on a private equity firm as an investor and can, therefore, assist in setting reasonable expectations for the transaction. This planning exercise can prevent disappointment and reduce or largely eliminate some of the common frustrations with the process. An experienced team of advisers will take a holistic approach to the planning process and examine your goals for both the company and your family. The team should be composed of an investment banker, a lawyer, an accountant and a wealth planner. The importance of having a team that works together, supports the business owner and serves as a resource cannot be overemphasized. The process of preparing a company for a sale—engaging an investment banker, preparing the confidential information memorandum for distribution to private equity firms and others, conducting management meetings, negotiating the LOI, undergoing due diligence, negotiating a definitive agreement with all of its ancillary documents and closing the transaction—generally takes up to nine months. A seasoned team of advisors can add significant value to that process.
Preparing for an Exit Is a Team Sport
The selection of the team is generally a process in itself, and if the owner's lawyers and accountants are experienced, they can be invaluable in the process. For instance, the lawyer will initially be the quarterback in the selection process (sometimes called a "bake-off") for the investment banker. Once the banker has been selected, the banker and the other team members will devote a significant amount of time to designing an optimal sale process. They will review and evaluate questions like: Should the sale process for your company be a broad competitive-bidding process (a "full auction"), which is designed to draw the greatest number of prospective buyers? Or would a "targeted auction" in which bidders are limited to a narrow range of likely prospects, hand-selected by you and your investment banker, be a better option? Each approach has its own pros and cons. In any scenario, the drain on management resources will be significant, and it is another area in which the owner will have to prepare the company for the sale process.
The planning phase is key because many business owners going through this process discover they have priorities above and beyond finding the highest bidder. What will happen to key employees? What if you are reluctant to show your books to a lifelong competitor who expresses interest in buying your company? What if you still want a place in the business you have built, even if you will not control it?
The process, whether a full or targeted auction, will be designed to generate the best types of offers for your business, from several appropriate investors. The benefit: You will have some choice with regard to the future of your company, and you can be assured that you are maximizing value and getting the most favorable terms.
As an alternative to private equity firms (sometimes referred to as "financial buyers"), the sale process may include potential acquirers called "strategic buyers." Strategic buyers have capital resources such as lines of credit that will enable them to compete effectively with financial buyers. In fact, if a strategic buyer needs your company (as opposed to wanting it), a strategic buyer may pay more for a company than a financial buyer just to get it. However, if a strategic buyer merely wants your company, they may want it at a price or on terms not acceptable to you.
One of the principal differences between a sale to a financial buyer and a sale to a strategic buyer is that strategic acquisitions usually involve the acquisition of all the equity in a company. In that instance, your company will be acquired by the purchaser through a sale of all of the company's stock, a sale of all or substantially all of the company's assets, or a merger with the acquiring company. In each of these instances, you would not have any further ownership in your company. Closing a deal with a strategic buyer can also involve a certain level of internal bureaucracy, especially in a large corporation where approvals must be sought from their board and various departments that might be affected by the merger or acquisition of your company. However, financing is usually not an issue in a strategic acquisition.
Selling to a financial buyer often provides the business owner with more flexibility than would a sale to a strategic buyer. In general, unless the sale is an "add on" to a private equity firm's platform portfolio company, the owner will usually be able to sell the company and "roll over" a portion of his or her equity so that the owner will have a "second bite at the apple" in four to six years, or at such other time when the private equity firm wants to exit the investment. This provides the owner with an opportunity to take some money off the table at the time of the initial sale to the private equity firm, continue to grow the company and then realize another payday when the company is sold a few years down the road.
Selling to a financial buyer also offers the most flexibility on deal structure and the best avenue to a future role for your management team.
Another Exit Alternative: The ESOP
As you evaluate your exit options, some conditions could lead you to consider the Employee Stock Ownership Plan (ESOP) alternative. In one instance, you and your advisors may determine in the course of the sales process that market circumstances and the competitive environment do not favor what you consider an adequate valuation, and that the primary value of the company as an ongoing concern is to the workforce employed by the company. This is a complex transaction that involves significant financing, but can also provide important tax and other benefits. For the owner deeply invested in the welfare of his or her employees, an ESOP transaction can be an attractive option worthy of exploration.
The Duane Morris View
Tom Redekopp: While we see financial buyers in the market all the time, we see just as frequently the other major force—strategic buyers. Since we handle M&A for a broad spectrum of mid-range and large corporations, we can provide owners with specific understanding of their priorities and the processes associated with each type of buyer. Business owners often tell us that this perspective is among the most valuable capabilities we can bring to the table.