Selecting the Best Exit Strategy

hello everyone and welcome to this edition of the m a university presented by pce investment bankers pce is an investment bank providing m a corporate finance and esop transaction services to middle market businesses today we're talking about various ownership succession strategies for a privately held business i'm david jasmine and i'm an investment banker with pce and i work out of the orlando area office let's get started with today's topic regardless of when and how you plan to exit data indicates that having an exit strategy increases the odds your business will sell at optimum value it's in your best interest to understand thoroughly and well in advance of your exit how the various strategies available to you affect you your company and your employees only then will you be able to craft an effective exit strategy that meet your goals and objectives over the next few minutes i'll outline three most common exit strategies utilized by middle market companies and describe the issues that owner must consider for each strategy you'll want to examine both the short-term and long-term goals as well as your desired exit timing to determine which strategy best fits you let's now look for the three most common exit strategies strategic buyer is an operating company within your business or industry and acquires your company to capture synergies a strategic buyer understands your business and has the infrastructure to manage your business operations a financial buyer is an investment fund that requires your company to realize a return on their investment today we see private equity and family offices active in m a private equity will hold an investment for five to seven years while family office generally over a much longer horizon financial buyer makes two types of investments a platform investment is the financial buyer's initial investment into a specific industry or perhaps a market an add-on investment complements an existing platform investment and the financial buyer intends to merge it with the acquired company to generate synergies finally in esop the stock of your company is purchased by a trust the trust is a retirement plan for the benefit of your employees so what do these buyers look like strategic buyers might be a competitor to your company or perhaps a supplier of products and services to your existing customers a strategic buyer might even be a customer financial buyers might be private equity groups or wealthy investors sometimes called family offices and an esop trust is established by your company as a qualified retirement plan for your employees it is represented by a trustee who normally engages an attorney and evaluation advisor if you sell to one of these three how much of your company will they buy strategic buyers will likely invest in a controlling interest only in order to merge your operations into theirs in most cases a financial buyer seeks controlling interest however in today's market certain groups invest in minority positions of companies that are seeking to grow if you will those financial buyers become financial partners with you to help spur on growth ethops provide the most flexibility amongst the three exit strategies and any percentage could be sold what's the timing difference on the payment of proceeds to you under the three different types of buyers the sale to a strategic buyer is optimal for a business owner in need of maximum liquidity financial buyers may vary if a platform investment substantially all proceeds are paid at close however a financial buyer usually requires a seller to reinvest some of their proceeds back into your company add-on investments most often 100 of the proceeds will be paid to you at close however you will be required to continue in a management role in the business acquisition and you can expect some reinvestment requests um similar to the platform but certainly not at the same level esop transactions are normally funded with bank financing and seller financing meaning a note is issued to you for some percentage of the total proceeds at the time of closing the principal on that note plus interest is paid over a negotiated period of time the structure is ideal for an owner looking to retire in the next three to five years and for a seller interested in preserving the culture and legacy of their company what about your role in the company post-close with a strategic buyer you typically have the option to completely exit the business you could be asked to stay on for a transition period which would be a point of negotiation during the deal process with a financial buyer a platform investment typically requires that you remain in a management role and continue to operate the business for some time an add-on investment however can be much more flexible you'll likely be required to remain with the company for a transitional period while the company is merged with the platform portfolio company and with an esop the seller has the greatest flexibility determining the future tenure with the company but does require a strong senior management team for you to completely exit so what happens with the culture and senior management that you've built with these three options the owner of a strategic buyer will likely introduce their processes ideas and reporting structure meaning there's no guarantee your company culture will survive with a financial buyer you'll be able to reinforce your company's culture during the rollover investment period and while you remain in a manageable but survival of that culture isn't assured once you've exited the business with an esop your company name stays on the building you can rest assured knowing that your seasoned managers the people you've recruited and trained who really understand your business continue to take care of the employees and your clients because the employees have a beneficial interest in your company employees of esap owned companies focus on your company's long-term success which has been shown to result in a much higher productivity than non-esophone companies when looking at these three exit strategies what important issues drive success for a strategic buyer the company should be able to run without you most strategic buyers want good financial controls and management processes to be in place and your culture will need to be a fit for the buyer's operations if a platform acquisition financial buyers will need a solid management team with a business plan focused on growth in your industry or market in position for expansion and continued growth esops require a focus management team and a business with positive growth prospects additionally senior management needs to embrace the opportunity to grow the value of the business utilizing the employee ownership culture created by esop ownership finally let's wrap up today highlighting the advantages and challenges each of these three types of exit strategies provide let's start with the advantages with a strategic buyer you retain the ability to exit your business without further involvement strategic buyers understand your industry and will do everything they can to take care of your customers the buyer usually provides a hundred percent of consideration at closing and often will pay a premium for the synergies that your company brings to their company and your employees should have continued opportunities to grow in a much larger merged entity financial buyers typically focus on their industries of expertise to bring not only capital but their knowledge and industry contacts financial buyers are well versed in the deal process so the transaction tends to be much quicker it normally will maintain day-to-day operational controls and finally financial buyers focus on the growth of the business resulting in additional return from your rollover investment and esop provides the greatest flexibility in the percentage of the company sold unique amongst these three options and esop provides significant tax benefits to both you the seller and to the company and esop is an exit strategy most commonly used to ensure the survival of the company's culture that you've created the transaction aligns the company and the employees values and the sale process in an esop is very efficient finally an esop transaction is the most confidential transaction as the process does not expose company information to outsiders are more importantly to competitors finally let's close with challenges with a strategic buyer the best buyer might be your competitor finding the right strategic buyer does take time the transaction process could be slow but the buyer's industry knowledge will be helpful during the due diligence phase however sale to strategic buyer could expose company information and trade secrets to competitors even though you're protected by an nda there is still risk your company name and culture might be lost after acquisition and upon merger of your business with the strategic buyer's business if synergies with your company do not exist financial buyers might offer a lower price than a strategic buyer would financial buyers often use increased or excessive leverage to finance a transaction much higher than you're normally comfortable running your business after the acquisition a financial buyer may focus on maximizing short-term profits possibly at the cost of long-term value provided beyond the window of time they plan to own your business with an esop you will not receive any premium for the synergies that you might be paid by a strategic buyer however you will receive fair market value you might be required to stay on for a much longer transitional period depending on the strength of your management team transaction does require a minimum number of employees and while you do receive cash at closing some proceeds will be paid over time whether you're looking to exit today or in the next five years it's never too early to start planning pce can work with you to determine what your company is worth today and help you develop a strategy to increase that value tomorrow effective planning can help you achieve your business goals and maximize sale proceeds every business owner eventually exits his or her business but not all business owners are adequately prepared for that moment contact pce today to prepare for your exit and learn how we can help you maximize results thanks for joining me today we welcome your comments and questions so please feel free to contact me at my information listed here if you like this presentation please subscribe to our youtube channel so you'll be notified whenever new content is posted [Music] you