Assuming you have decided to partially or fully exit your family-owned business, there are multiple exit strategies you could use.
The choice of strategy depends on:
- your strategic objective (most important):
- Are you looking to raise partial financing while retaining control?
- Are you exiting fully?
- the overall size or valuation of the company:
- The valuation needs to be large enough for an IPO to be a viable option.
- For lower valuations, there is a wide range of choices between selling to private equity investors or other companies operating in the same or similar sectors.
- the industry of your company:
- Different sectors have very different dynamics when it comes to investments and divestitures.
- Some markets have bigger depths than others.
- Example: The criteria for what is an acceptable size to IPO varies from country to country and, more importantly, from one exchange to another.
Now let’s consider the different avenues, with their pros and cons:
1. Initial Public Offering:
“IPO” is the first word that comes to the mind of many people when thinking about opening up their capital or letting other investors in.
From a family owned business perspective, this has many advantages:
- No single other shareholder will have a big enough stake to influence the decision making.
- IPO valuations can be very attractive when the market is strong as is the case at the moment.
- The visibility provided by being a public company raises the profile of the business significantly.
- A higher profile means
- more people are interested in doing business with you
- employees are more likely to want to join you, and
- bankers and credit officers may look upon you more favorably.
However, there are also disadvantages, or constraints that come with being a public company:
- Disclosure obligations: Some family business owners do not want to share all the information about their business model and profitability.
- Corporate Governance and transparency have to be at a higher level now that the company will be in the public eye permanently.
- Reporting to regulators and investors also comes at a cost.
- These constraints also generate better transparency and disclosure which:
- improves your credit profile and
- your attractiveness as a business partner or employer.
Most importantly, it is crucial to understand that the IPO route is only open to a very small minority of businesses who are looking for financing or a partial exit. Hence alternative routes are much more commonly used
2. Selling to a financial investor:
Financial investors come in a wide variety of names and characteristics:
- Private Equity (PE) invests in profitable, cash flow generating companies, and look for an exit within 3 to 7 years.
- Venture Capital (VC) back smaller companies which may or may not be profitable yet but are expected to grow very fast.
- Angel investors come in the very early stages of companies, and will exit partially or fully to the VCs or PEs.
- Other families or individual investors have the characteristics of any of the above, but could also be much more long term oriented. Essentially a meeting of minds between individuals could be customized to meet the strategy of any company at any given time.
Given the variety of potential financial investors, it is difficult to list a homogenous list of advantages and constraints that come with them all.
Focusing on the PE investors, some of common pros and cons for family businesses are:
- Pros for the for the PE team:
- Supports a management team without taking control.
- Brings financial management value.
- Adds credibility with the financial market ahead of a potential public listing.
- Can reach an investment decision in a reasonable amount of time because they are professional investors.
- Cons for the for the PE team:
- The PE wants to exit the business in a reasonable amount of time.
- PE wants a seat at the board with influence over some key decisions.
- Many family owned businesses are concerned that PE investors do not understand the business well enough “because they are not from the industry.”
3. Selling to a strategic investor:
The term “strategic investor” refers to another corporation operating in the same or a related industry. Such an exit could also take a variety of shapes.
Mergers and joint ventures that do not generate cash for the owners are not considered an exit. However, a partial stake sale or a joint venture that allows for the growth of the company may be interesting avenues if they achieve the strategic objectives of the owners.
A full sale to a competitor is a common exit route. The key advantage of such a sale relative to private equity is that “strategics” are not generally looking for an exit and this will reflect in a potentially higher price. Obviously, a full sale is generally the end of the road for the founders or family business owners, subject to potential lock-in agreements where the new owners may ask the founders or current managers to stay on for a while to manage the business during the merger integration process.
In summary, there are numerous partial and full exit avenues available and they require careful consideration as a function of the owner’s strategic objectives. In my next blog, we will discuss the appropriate choice of advisors as a function of the company’s strategy.
As always, I welcome your comments and questions below. I also invite you to request instant access to my download, 17 Essential Questions for Family Business Owners.
To read more in my series about family business valuation and exit strategies, here are a few links to:
- Why Business Valuation is Essential for Strategic Decision Making
- Should Your Family Business Have an Exit Strategy
- Business Valuation is Key to Any Family Business Exit Strategy