The glamour and prestige of an IPO (floating your company on the stock exchange) drives many business owners to attain that ultimate public accolade. The idea that your company listed on the ASX, NASDAQ or Wall Street (and made you millions) motivates many business owners.
Even, if just in secret.
But the reality is almost always different to that. In all of our years in practice, the number of amazing businesses that succeeded in listing can be counted on one hand.
Sure, our clients typically employ under 500 people so perhaps that statistic is inevitable. Nevertheless, it is rarer, harder and much more expensive than you might think.
So, if an IPO is an unlikely succession solution, who are the other probable suitors for your business?
Turns out that there are quite a few. And interestingly, there is a very good chance that you already know them… personally. And if you had only realised that years earlier, maybe your respective relationships may have been different?
Who are these people?
1. Your family
For centuries, succession within a family has always been the most likely form of transition of ownership. The Royal Family are experts at it. So are farmers. In both cases, the oldest boy used to be the anointed one. Even if they didn’t want it.
Eventually, transition has now become less gender specific, although not in every family. It still seems that many families retain a ‘first-born’ bias, even if only for practical reasons. It takes many years to educate, orientate, train and mentor children to be successful in the family business, so the one with the head start has the odds stacked in their favour.
Naturally you already know your own children. Whether or not they will (or should be) your successor depends a lot on individual circumstances. An engineering business is unlikely to transition to an only child who trained as a florist.
Nevertheless, many parents look at their kids and wonder whether to bring them into the business and whether it is the right call. Might be worth getting some advice about that decision?
2. Management Buy Outs
MBO’s are not as rare as people think. We have seen a number of successful and unsuccessful take overs of businesses by the management.
In most circumstances, they are a friendly affair, where the previous owners help transition their management into becoming owners. This takes the form of assistance with funding, mentoring, active involvement in early years and a range of supports designed to ensure that the transition is successful.
There are also hostile takeovers, but they are the stuff of Hollywood as far as we can see. If a successful MBO is remotely likely, you will know these people. In all probability, you may also have to convince them to explore this as an opportunity.
Again, this is something that we have done from time to time. But don’t be surprised if the most fabulous life-time opportunity is ultimately rejected by your management. It can be heart breaking.
Business Ownership (with both risk and reward) is not for everybody.
3. Partnership Transition
This is probably the most successful form of transition of ownership for Professional Service firms. It has the advantage that it enables the highest performing people to be brought on as future owners, usually bit by bit. They earn their way in.
Equity is valued by some mechanism (such as an agreed multiple of earnings) and the process of acquiring and divesting equity captured in the partnership (shareholder/unit trust) agreement (along with all the other rules).
Clearly, you will already know these people too. At least in the early years. Moreover, those transitioning the process will retain control for a period of time. Eventually, even though the original owners may still retain some element of ownership, the young ones will one day rule the roost.
Whilst Professional Service businesses occasionally publicly list, or are acquired by other larger practices, the outcomes are not always successful, as ownership and management can become too remote.
4. Competitors, Suppliers & Customers
Whether it comes by design or by surprise, it turns out that there is always a lot of interest in successful businesses within your market sector. That interest invariably focusses on those best performing businesses that seem to have something special to offer.
This group of prospective future owners all have something in common. It starts with the obvious aligned synergies of costs and revenues. This is where a sharing of clients, products, infrastructure and overhead delivers both revenue upside or cost savings for both businesses.
Further, this group are most likely to perceive some form of strategic advantage over and above these synergies. That could be… know-how, technologies, patents, processes, client reach, geography, supply chain, in-house skills, culture and of course, your brand.
Correctly positioned, these subtle factors can see a sale consummated at a price significantly higher than a pure business valuation. Amazingly, in nearly every case we were involved in, the vendor knew the ultimate purchaser. Often knew them really well. They just didn’t realise at the time that they might be interested.
When we help clients with their long-term exit strategies, we spend considerable time exploring the business’s competitive advantages, the likely synergies and using prospective strategic upside, identify the groups and individual targets that might well be the prospective owner.
That then forms the basis for much of the planning and tactics for the next few years.
Some of these future owners are very big businesses and may already be public companies. They have deep pockets and compelling offers. But make no mistake, your business may never be the same again. The cultures might be very different.
5. Venture Capital
Over the years, many of our clients have been approached by venture capital investors. This group of buyers has a unique timeframe. They usually need to get in and get out in a limited time. They will acquire and dispose of your business in perhaps as little as three years.
These are not long-term patient investors.
Quite often, their strategy is to roll-up a number of similar successful businesses around the country and float the new group on the ASX. Their upside comes from cost savings, scale, proper management and reporting structures, large marketing budgets, brand and of course, the fact that the price paid for a dollar of profit on the ASX is substantially larger than the amount paid for the businesses they buy.
They use debt to further enhance the uplift of their acquisitions.
You probably won’t know them, but you will know their other targets. And those other targets may well be tied to that same outcome and will be keen for you to join the party.
This can work spectacularly. It can also flounder if progress on the overall plan slows too much. Can be great but be careful of the promise of future riches.
6. Pure Investors
These are the people who walk around with bags of money under their arms looking for great businesses like yours. We don’t know any of these people, but they must exist because we get asked all the time if we know any.
There are a few people who look to change careers or find businesses for their kids and we have actually seen these from time to time. Indeed, business brokers who deal in selling small retail and commercial businesses are reasonably common.
It was only after the first decade of reflection on succession that I realised that there was nearly always a strong existing connection between buyer and seller. After that, we built that awareness into every Exit Strategy plan. With powerful consequences.
Who might that future owner be for you?
Business Specialist Partner