Our previous blog regarding the Mergers and Acquisitions Process answered the question “When is the best time to divest an organization?” The next logical question is “How best is this approached?”
The options on “How?” are:
v Planned or unplanned
v Family legacy
v Strategic alliances
v ESOP
v Roll-up
v Sale, asset, or stock based
v Financial investor
v Strategic investor
v IPO
Planned – If properly planned, the financial and cultural advantages are many. In a professionally managed merger and acquisition process, the person or company involved in a divestiture has an opportunity to consider the options and to choose the one that best fits their financial goals.
In a privately owned organization, a high level of emotion is often involved. The owners have built a culture and they would like to see that culture continue under new ownership. In a planned process of merger and acquisition, the current owner can select a potential new owner who they believe will most likely perpetuate the culture. It is also possible to build in certain caveats or covenants to help ensure that the current owner’s wishes will be honored.
Unplanned – An unplanned exit is not an acceptable alternative. Such an occurrence may happen in the untimely disability or death of an owner and the estate is left with few options. The business may be divested at fire sale prices.
Family Legacy – In a family held organization, ownership may create a legacy by effecting a merger and acquisition transaction to another family member. When this occurs, special concerns must be addressed. Is more than one heir apparent? If so, will this create disunity? Which person is most qualified and prepared to take on added responsibilities? What development activities should be in place to prepare a successor? Succession planning in a family held organization must address these and other issues, often with a high level of emotion.
Strategic Alliance – Strategic alliances are another form of merger and acquisition. Prior to fully divesting an organization, an owner may choose to form an alliance with another organization. Such an alliance can be mutually beneficial to both organizations and over time, one organization may choose to buy out the other completing a full acquisition. Usually, each organization considering an alliance focuses on their respective strengths and areas of lesser strengths called weaknesses. A well-chosen alliance partner will complement their strengths and shore up their weaknesses through the other partner. One great benefit of such an alliance is the developing of mutual respect and confidence resulting in trust. As trust is secured, the success of the surviving entity is enhanced should a divestiture occur.
ESOP – In an ESOP, the business owner may choose to sell the organization to persons currently employed by the business. Sometimes, it is the members of the existing management team who are in a position to fully understand the operation of the business and feel they could be successful in continuing to grow the business. It is possible that all members of the organization would choose to participate in the buy-out and in essence, be a part of ownership. Finding the funding to effect an ESOP may be quite difficult unless the group can collectively secure the necessary resources. The group may also ask the current owner to help finance the buy-out by carrying a note for a period of time. The complete change of ownership may be a combination of these alternatives and take place over time. It is always wise for the current owner to seek professional financial and legal advice.
Roll-up – A technique called a roll-up may also be used as a form of the merger & acquisition process A business owner may decide to acquire other businesses similar in profile to the existing business thereby growing the current business through acquisition and thereby increasing the overall value of the resulting entity, therefore increasing its salability. The use of a roll-up requires long term strategic planning and may take place over an extended period of time. The process may also uncover additional management depth through persons from the acquired companies which contributes to sound management succession planning which may be of interest to the ultimate purchaser.
Stock or asset based sale – One of the first considerations for a business owner planning divestiture of an S or a C Corp is, “Should this be an asset or a stock based sale?” In the case of an LLC, it would be a unit based sale. Many potential buyers prefer an asset based transaction which they believe is less complicated and does not carry potential hidden liabilities. Other potential buyers prefer a stock or unit transaction as this provides great flexibility in shared ownership, such as declaration of dividends. In all cases, before making a decision, it is wise to seek professional advice as tax implications and estate planning issues must be considered.
Financial investor – These investors are sometimes referred to as venture capitalists, private equity firms, or high net worth individuals. All are interested in a return on their investment. They may or may not be interested in actually running the company but may seek a professional manager to do so. They may ask the current owner to share in the risk by holding some paper or by structuring an earn-out based upon the company’s performance. The financial investor will often ask and expect the current owner to stay on through a transitional period.
Strategic investor – Such an investor will likely have other holdings in the same or similar businesses and, as such, are seeking to grow their holdings through acquisition. Much like a financial investor, they will be expecting a return on their investment. However, the return may not be as immediate but is positioned for long term growth in their entire group of holdings. Again, they will likely expect a smooth transition of management but will likely have viable candidates for managing the new acquisition.
IPO – The transition from a privately owned organization to publically owned organization through an Initial Public Offering requires the use of experienced firms who specialize in effecting the transition. Such expertise will be required in financial, legal and regulatory issues. Properly executed, the rewards can be significant. One area not always addressed is the impact on the culture of the organization and upon the lives of people. Privately held organizations often have greater freedom in decision making without scrutiny of Boards of Directors and regulating bodies. The type of transition must be well thought through.
Consider a no-obligation face-to-face visit with Keith and make a decision with which you will be comfortable. View our website at IronsGroupLtd.com, email IronsGL@aol.com, or phone 815-543-0693
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