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Grooming Your Business For Exit (Part 2)

How to get the maximum value when selling your business

In Part 1 of Grooming Your Business for Exit, to assist in your business exit planning, we provided a checklist for grooming your business for sale and considered the option of a trade sale. In Part 2, we look at other options for you to evaluate for your business exit strategy.

Stock exchange listing

Floating your business on the share market through an initial public offering (IPO) may get a higher price for your business by tapping large, liquid equity markets but comes with considerable costs and risks.

IPOs suit companies that:
• Have existing managers and owners who wish to stay involved in the business
• Have high growth and need additional capital for expansion and acquisitions
• Need to motivate and attract managers and directors
• Wish to raise their public profile
• Have a significant capitalisation to ensure appropriate attention of institutional investors (preferable to have a market value in excess of $50 million after the float).

Should I float my business? Advantages and disadvantages of IPOs
Pros Cons
Owners of companies in hot or fashionable sectors can exploit the high valuations offered by the public markets, for example, the late 1990s technology boom. IPOs are costly and public companies face ongoing expenses for listing and regulatory compliance.
High profile and strong brand-name companies can exploit their public recognition to charge higher prices. Loss of privacy and constant scrutiny by the market and media.
Provides access to capital markets for further fundraising to support growth. Constant market pressure for short-term performance and exposure to market volatility.
Allows owners and managers to retain financial and leadership stake but provides a liquid market when they wish to exit. Potential loss of control of the business.
An IPO does not provide an immediate exit as the vendor is required to maintain a significant stake after flotation and is subject to timing restrictions on sales.

Private equity

Management buy-outs and buy-ins (MBOs and MBIs) are valid sales strategies with considerable advantages, including investment flexibility and the ability to protect employee interests.

In an MBO, the company’s executive team and outside financiers purchase your stake, while in an MBI, an outside management team leads the purchase. In both cases, most of the funding is provided by a mix of bank debt and private equity from a third-party investor (refer to the box). This means the management team does not need to have great private wealth to participate. As a rule of thumb each executive contributes 1 to 1.5 times their gross annual salary.

How Management buy-outs (MBOs) and Management buy-ins (MBIs) are funded

The buyout of a $20 million company would typically be structured as follows:

Management $1.0 million
Private equity finance $9.0 million
Bank debt $10.0 million
Total $20 million

Although managers contribute just 5 per cent of the funding, they will typically receive further equity through their compensation package as an incentive to grow the business for the benefit of all investors.

MBOs and MBIs best suit relatively stable businesses with consistent low-risk growth opportunities, which fit the investment and lending profiles of private equity investors and banks. Banks and private equity financiers are unlikely to finance riskier high-technology or high-growth companies.

A major attraction of private equity is the flexibility it permits in how much you sell. You may choose to maintain an investment stake, for example.

An MBO or MBI may suit your company if it:
• Has competent managers with a track record of delivering profits and growth
• Is an attractive business that has been groomed with reasonable growth prospects
• Has a sound growth strategy
• Operates in a mature industry or sector.

Is an MBO or MBI right for me?
Pros Cons
Fewer confidentiality concerns as you are selling your business to managers and third-party financiers rather than competitors. Company requires a sound growth profile and strong management to attract third-party investment.
Sale is a seamless transition for employees, customers and suppliers. Unlikely to match the price generated by a trade sale as synergy gains are not factored into the transaction.
Company retains its identity and independence. Private equity investors ultimately seek a return on their investment when they exit the business via trade sale, public listing or refinancing their investment.
Rewards your management team (and potentially all of your employees) for their loyalty and efforts.

Whether you are making a clean break or are exiting by stages from your company, selling a business is not only about getting the right price but also about managing the change in your lifestyle. Keep your personal goals in plain sight as you run through the options and develop your business exit plan.