There are a wide range of options for Business Owners to pursue, including Mergers & Acquisitions, Sales & Divestitures, Recapitalizations, Management Buyouts, Employee Stock Ownership Plans (ESOPs) and many others. Mid-Market Securities will present and analyze the full complement of alternatives with Business Owners, and customize the approach to meet specific needs and objectives. Mid-Market Securities’ investment bankers are seasoned professionals with large firm experience and expertise, and domestic and international processing capabilities (unique among middle market firms).
Some of the exit strategies used in Succession/Exit planning include:
Family succession involves selling or transferring a business to family members. A privately-held business typically represents a lifetime of work on the part of the Business Owner and Founder. Many Business Owners want to preserve their Business as an opportunity for the next generation. This may or may not be the right strategy; which if any of their heirs are interested in the business? Individual goals and objectives, skills and personalities compete with family and business goals and needs; and emotions present and impact succession. While every situation presents unique issues and challenges, our Bankers are experienced and creative, raise the right questions and critical issues and provide reasoned and objective guidance to assist Business Owners and their Families through the process.
Management Buyout (“MBO”) is a strategy in which the business is sold to the Management Team. This strategy facilitates transition as well as continuity of business, but a Business Owner must assess the competence and financial capability of the Management Team. Frequently, lenders fund the Transaction with the Company’s cash flows or assets as collateral. This may result in the Business Owner receiving the proceeds over time and retaining business risk. An MBO is not always suitable for the Business Owner. If a Business Owner decides to pursue this strategy, it is important to retain a qualified third-party not only to customize the Transaction, Structure and Price, but to assist with what could be awkward negotiations with the Management Team, as well as to help with securing Financing for the Transaction. Sale by a Business Owner who takes paper as well as cash has “Stapled” two decisions together: (1) do I want to sell my Company for $X; and (2) do I want to invest $X-$Y in my Purchaser?
EMPLOYEE STOCK OWNERSHIP PLAN
An Employee Stock Ownership Plan ("ESOP") is a type of pension plan which can borrow money and is designed to invest in the stock of the Employer Corporation. Numerous tax incentives confirm the public policy encouraging this activity. While it is not right for everyone, current market and business conditions suggest it is an idea worth consideration by Business Owners. Properly structured, the Business Owner takes money out tax deferred and, if desired, free of income tax completely. The stock purchase is funded with asset based and/or cash flow loans which are repaid (interest AND PRINCIPAL) with pre-tax dollars. The stock ownership going to employees can be in addition to or in place of other employee benefits and typically has a positive impact on employee recruiting, retention and training costs. The requirement that the Employer Company repurchase shares (which can be suspended until after the loan is repaid) from a departing employee provides a market for the shares and allows valuation with little or no illiquidity discount, typical of private company valuations. Contrary to myth, employees do not gain control over the business and do not have access to financial information.
SELLING TO OUTSIDE ENTITIES
Most often, selling to outside entities is the common exit strategy for Business Owners. A Business can be sold to a Strategic Corporate Buyer or to a Financial Buyer. A Strategic Corporate Buyer usually pays the highest price for various reasons --- merger synergies, desire to enter into a niche market, increase their market share, etc. Financial Buyers are typically Private Equity Groups (“PEGs”). PEGs invest in companies that have growth potential and would benefit from the injection of expansion capital, yielding higher return on investment.
A Recapitalization is an ideal solution for a Business Owner who wishes to sell a portion of the Company for liquidity or estate planning purposes, while retaining significant equity ownership to participate in the Company's upside and earn a second "payday" down the road. This structure allows the Business Owner to achieve personal liquidity and in many instances retain operating control of the Company.
A Recapitalization is different from that of an outright sale of the Company. The Business Owner continues as a partner and manager of the Company. The new partner is a PEG that shares the Business Owner's culture and vision for the future of the business. As partners, these PEGs are able to bring strategic opportunities to the Company that were not previously available, and can provide strategic management experience and assist the Company to its next level of growth. A Recapitalization offers Business Owners many potential benefits:
Business Owners diversify their risk so that all or a significant portion of their net worth is not tied up in the Company. Personal guarantees on Company loans are eliminated.
The Business Owner realizes a significant liquidity event by extracting the bulk of the Company's current value. It is not uncommon for a Business Owner to receive 90 percent of his equity in cash while still maintaining a 15 percent to 30 percent ownership interest.
Additional capital is available for corporate growth, including acquisitions.
The Business Owner continues to run the Company.
The Business Owner continues to participate in the economic growth of the Company — growth that can be accelerated by the new partners. In many cases, retained ownership has grown to be worth more than the entire Company was worth at the time of the initial Recapitalization — thus providing a significant "second bite of the apple."
Offering shares to the public through an Initial Public Offering (IPO) or through a Direct Public Offering (DPO) is another liquidity strategy. Not all Companies can pursue this strategy due to the complex nature of IPOs and the market capitalization requirements of exchanges. While under the right circumstances, going public may be attractive, there are significant costs and risks.
SAMPLE MMS LIQUIDITY STRATEGY
To discuss these and other strategies, please call us at 212-400-4050.