Part 5: Transitions, transactions and trust in business
We are considering an important hypothetical scenario. Two partners set out to sell their company. Most of their net worth is invested in their business and one of them happens to have a health issue – so they want to diversify their wealth holdings. After taking their business to market and receiving an excess of six offers, they ultimately select the offer that allows them to take some money off the table based on a high valuation. However the terms and conditions of the deal are such that the cost of capital is higher than they could have attained from a traditional lender. Instead of selling 100% of the company to the highest bidder, they end up selling a minority position with fewer oversight obligations.
Why does this matter?
There are many ways to take your money off the table when selling a business. The concept of “taking money off the table” in this case, is in reference to entrepreneurs who have built a business, but their net worth is tied up in the company – it’s not cash and therefore is not readily available, like a public stock, which you can sell in the market. The sources available to them to access capital range from banks, to private equity and everything in between.
In this series, we will explain that not all deals are made equal, how to assess offers, important questions to ask during the sales process and how to best access capital.
This is the final post in our five-part series on assessing trust and capital during a transaction process. Our previous four posts explored how to assess deals and offers, outlined questions to ask throughout the sales process and even talked about shifting directions during the transaction process. You can review our previous blogs posts here: Part 1, Part 2, Part 3 and Part 4.
At this stage in our scenario – established in the past four blog posts – two owners of a successful business are interested in selling to a private equity group who would charge them 20% interest, in addition to their 5% equity holding (payable if the owners decided to sell in future or remove the capital provider from its capital structure).
It’s important to note these partners initially set out to sell their business and wanted to step back from operations. As they went through the transaction process however, they changed their minds (see Part 4). In the end, the partners decided to go with the capital that was more expensive for their business and sell to the Canadian private equity (PE) group.
I’ll leave you with some final questions to consider, now that you know what choice they made.
Why would they make this decision? What do you think the factors were? Was it trust?
Was it that they did not want people within their community to know their business and how much money they were actually making?
What else do you think impacted their decision?
If capital was 14 to 15% more expensive but came with access to certain networks or perceived access to certain networks – would you pay for that? And how much would you pay?
Did the partners end up with more control in the end, because they didn’t have to report on their financials – two covenants discussed during negotiations – but instead would just have to report on revenues?
Thank you for reading this series – I hope it provided some insight on the potential twists and turns of a transactional journey. Though every situation is different, there are best practices and key questions to consider whenever owners of a business are interested in taking money off the table. From determining whether a deal is the best choice for you to assessing buyers, determining trust, and even shifting gears half-way through a sales process, I hope these examples have been of value. Please connect with me at firstname.lastname@example.org if you have any questions!