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At any given point, a business basically has three strategic alternatives to consider – pursuing growth, restructuring to bring in more cash or selling the business – each has its own risks and rewards for the owner to consider.
Entrepreneurs can look to accelerate growth organically or through an acquisition. Whichever path, executing on a growth plan typically requires putting more risk into the business to achieve a higher value.
Organic growth means leveraging the balance sheet to invest in new products, services or market strategies. For example, take a client who sells household items to big-box stores. Feeling the pressure from online sales, they invested capital to add capabilities to serve individual Internet customers. By investing to rework equipment to meet the demands of smaller online orders, the client is able to serve an entirely different customer type with an existing product. Keep in mind that in addition to the risk that comes with leverage for this growth, the rewards are also often longer term.
Organic growth can be supplemented by growth through acquisitions, and we approach this similarly, by thinking about the customers or products/services the business has today, versus the customers or products/services it wants. The best acquisition is something that brings in new customers for your existing products and services or new products/ services for your existing customers. That means investing in something familiar to the business, so it is critical to focus on synergies to ensure a good fit. While an acquisition also means leverage and risk, an equity partner can be used to share risk and return. Also, remember that an acquisition can facilitate a size premium and higher multiple upon future sale.
In a stock repurchase or recapitalization, a business owner is really trying to take some cash off the table to either decrease the risk in the business or their risk as an owner.
Three common ways this typically works with our clients includes:
When an owner is thinking ahead to an exit, it usually means looking at selling the business, either in part or in total.
Many entrepreneurs have a difficult time with the idea of a partial sale, where ownership is diluted and the operational decisions they are used to making independently are now shared with other investors. But selling less than 100 percent of the business also can provide the owner with additional liquidity, as well as the ability to diversify their holdings. We often see partial sales working well with clients who have a vision for where to take the business before exit and a strong team to carry it out, but lack the capital to get there.
A total sale is typically the most important financial event of an entrepreneur’s life. Here, the focus is on maximizing value, getting as much cash up front as possible and ensuring the deal meets the owner’s longer-term financial needs. Emotional considerations include letting go of a business many owners have worked most of their lives building, as well as concern for the future of the company and its employees. To help achieve maximum value, we tell our owners to be prepared and willing to stay on board for two to three years post-sale, although this timeframe often ends up being shorter.
Want to explore the strategic alternatives available to your business? Look to the investment bankers at Doeren Mayhew Capital Advisors to understand your objectives and devise a plan for moving forward. Contact us today!
This publication is distributed for informational purposes only, with the understanding that Doeren Mayhew is not rendering legal, accounting, or other professional opinions on specific facts for matters, and, accordingly, assumes no liability whatsoever in connection with its use. Should the reader have any questions regarding any of the news articles, it is recommended that a Doeren Mayhew representative be contacted.
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