If you’re considering selling your business or realising some of the value in it, now or in the coming years, it’s important to properly understand your exit options.
The good news is you don’t necessarily need to decide on which route you’re going to pursue now, and potentially not even at the start of a sales process. Your focus at this point should arguably be on creating optionality and retaining it – for example, do you have the growth and management team for a PE deal? Do you understand your trade buyer population and are you adjusting your business model to maximise their interest in you? Are you prepared for a process – do you have the financial information, controls and governance to get through what can be a gruelling process?
Optionality also creates the opportunity for competitive tension through a wider buyer pool. The sales process will ultimately enable you to assess the relative merits of each option with the context of the best positions that each option can be taken to – only then do you need to make your decision.
There are principally four choices available:
- Minority sale to private equity (PE)
Majority sale to PE
Minority PE Deal
There has been a marked increase in the number of minority PE deals in recent years, given the attractiveness to de-risk an element of your personal wealth that would otherwise be tied up in your business, while retaining the majority of the equity as it continues to scale. Minority investment is available from most of the traditional mid-market PE funds, as well as a growing number of minority-specific funds. Minority investors often refer to themselves as “passive investors”, who will be less hands on than the majority investors, providing “patient capital” where the timing of the PE house’s exit is more flexible, being “lighter touch” on due diligence requirements and “less onerous” on key legal terms. That being said, they will still want a degree of control and protection for the investment that they’re making.
Majority PE Deal
Majority PE investment is what it sounds like - the PE house taking a majority position. Whether the PE house is able to take a majority position is, in some cases, a factor of the level of cash out they’re comfortable providing. The general rule of thumb is that if you’re a key member of management without clear succession, you’ll be asked to rollover at least 50% of your proceeds. This ensures you are aligned in driving the future growth of the business alongside your new investor. Therefore, depending on the roles of the shareholder base, their relative re-investment versus that of the incoming investor may be higher, creating a minority PE deal in that instance. A PE deal, whether minority or majority will enable you to place equity in the hands of your wider management team, enabling you to align your team to create value over the investment term.
The availability of an IPO as an option is dependent on whether the markets are open – which has not always been the case given the events of the last 36 months. We anticipate that they may start to open up again towards the end of this year – providing a credible alternative to a PE and trade sale – albeit consideration should be given to the scrutiny and expectations that come with being a listed entity with an investor base to be accountable to.
A trade sale provides the opportunity to maximise your day one proceeds, given that trade buyers will likely look to acquire 100% of the equity in the business, to be free to integrate your business and take the benefit of all revenue and cost synergies. This means neither you nor your management team will share in any of the future growth of the business. It does provide the potential for a clean exit, after a 6 to 12 month handover period. However, you will want to consider the cultural fit of the prospective buyer to ensure it represents a good home for your business and former team.
Bear in mind that although you’ll be selling 100% of the business, given the chance, trade buyers will often seek to hold back proceeds through instruments such as deferred consideration or earnouts, payable later based on certain scenarios or financial performance, to mitigate the risk of earnings not being sustained or not growing in line with projections post deal.