In the world of mergers and acquisitions, there are typically several hundred transactions per week. While many of the multibillion dollar, cross-border transactions attract most of the press coverage, a vast majority of deals involve micro – and middle-market companies. These transactions involve mergers, acquisitions, leveraged buyouts, management buyouts, or recapitalizations, and involve companies with enterprise values between two to several hundred million dollars.
There are a variety of reasons why owners sell their companies or explore strategic and capital raising alternatives. A vast amount of deal structure possibilities exist to accommodate varying objectives. The owner (normally with the advice of an experienced M & A advisor) will seek out a structure that best meets one or more of his or her objectives.
Read on as we explore the motives behind M & As from the seller’s perspective. Understanding this process can be an important step for investors in researching a company they own or are considering buying into. What happens to a company once it’s acquired is often determined in the details hashed out in the merger/acquisition process.
Why Owners Sell
Owners who agree to sell their companies may be tired of running the business and seek either a full or partial exit. If an owner wants to liquidate 100% of his or her equity, acquiring investors will usually offer a lower acquisition price. This is partly a result of the greater difficulties that are anticipated in running the business after the transaction if the owner is not available to help with the integration process.
A recapitalization, where the exiting owner retains a minority equity stake in the business (typically 10-40%), is a more common structure. In this case, the exiting owner has incentive to help increase the value of the business (normally through part-time effort). The exiting owner will still benefit from a gradually diminishing
role in the operation and the freedom to enjoy more leisurely pursuits. Once the owner is out of the picture, the combined entity will have a go-forward plan in place to continue to grow the business, both internally and through acquisitions. In addition, the exiting majority owner will see the value of his or her equity increase if performance benchmarks are reached. It is important to remember that large companies receive higher valuation multiples from the market compared to smaller companies, partly due to lower enterprise risk.
An exiting owner may also wish to convert his or her equity into cash. This is because many business owners have considerable net worth, but a lot of this value is often value tied up in the business, and thus illiquid. Unlocking this equity through a liquidity event may reduce the seller’s risk by diversifying his or her portfolio and allowing the seller to free up more cash.
Another common exit scenario involves an elderly owner who is experiencing material health problems, or an owner who may be getting too old to effectively run the business. Such situations often necessitate the need to quickly find an acquirer. While business development officers of strategic companies can move the M & A process rapidly, large companies often do not respond quickly enough because they are hindered by a number of bureaucratic processes that cause delays (ex. managerial and board approvals).
In the acquisition marketplace, private equity appears to be better suited to quickly engage the owner, assess the business and complete the acquisition.