Stepping up to the selling block

What triggers a sale of a business, a private equity investment or a public offering? There are two distinct motivations: One is a desire to sell all or part of one's ownership to new shareholders to “cash out” and put money in the bank; the other is the need to bring new equity capital into the business to accelerate growth or for other business purposes. Your ultimate goals will determine which transaction is right for you.

The decision to sell is primarily driven by a need for liquidity and wealth planning. On the other hand, going public through an initial public offering (IPO) is primarily driven by a need to raise new capital to fund growth. But each method can achieve some hybrid of the following objectives:

1. Selling shares for personal cash and wealth planning — best achieved in a sale

2. Diversifying risk by not having all one's eggs in one basket — best achieved in a sale

3. Raising fresh equity capital to fund an important growth project — best done in an IPO or minority private equity raise

4. Establishing a market for company shares, and increasing public awareness — best achieved in an IPO

	Selling all or part of your company

Why sell? The sale of a private company can take place any time the owner wants to obtain liquidity of the personal wealth tied up in the business. It usually occurs when the CEO/owner decides to slow down or retire. Particularly in cases where there are no children interested in — or capable of — running the business, a prudent solution is to sell one's shares and invest the proceeds in a carefully diversified portfolio.

Retirement typically precipitates a sale because an owner feels it is too risky to leave the business in the hands of new management as he or she retires, while still having a substantial portion of net worth in the company. The point is to diversify risk by not have all the family's eggs in one basket.

Other reasons to sell can include concerns about business risk in the future or simply a desire to capture value created in the company to use the proceeds for other investments. A partial sale of equity is used to raise fresh capital to fund special projects.

SALE CONSIDERATIONS: Business owners have several secondary objectives when they sell. First, they want to maximize valuation. Then the business owner has to plan the remainder of his or her career and develop a succession plan that works within the new owner's expectations.

The company owner must also accept the shift of control to the buyer in a majority sale. And he or she needs to decide if the sale should be for all or only a portion of one's ownership.

What's more, many owners will focus on the type of buyer and how they will impact the employees after a sale. And finally, the timing of a sale should be carefully considered far in advance to achieve the best results.

MAXIMIZING VALUATION: Most businesses today are sold using the services of an investment banker who is experienced in managing a competitive selling process. The investment banker will “auction” the company to the highest bidder.

This formalized sales process takes about six months, and helps structure solutions to many of the other sale considerations. This is the best manner to maximize value and increases the likelihood of a completed transaction.

In a sale process, the CEO/owner should continue to run the business in the usual manner. Owners of some direct marketing firms may try to maximize valuation by temporarily increasing profitability — not a great idea.

For example, a cataloger who traditionally circulates catalogs to a six-month or 12-month breakeven will sometimes reduce circulation to temporarily boost profits. Our experience shows that this backfires because most sophisticated investors will recognize that a new circulation policy was implemented for short-term gain.

MANAGEMENT SUCCESSION: Most buyers expect continuity of management after an acquisition. So a CEO/owner must plan a sale a few years before selling. In the case of a private equity investor, a CEO/owner should expect to remain active in the job at least three years, and up to five years.

A strategic buyer (a larger operating business) will be more flexible, and often the CEO/owner can depart within six to 12 months. The best plan for an owner is to build a deep organization capable of running the company long before considering a transaction, with handpicked individuals who are capable of leadership roles.

BUSINESS CONTROL: A sale of more than 50% ownership generally transfers control of the business to the buyer. In instances where the buyer is a private equity investor, the CEO/owner is expected to continue to make day-to-day operational decisions, but is subject to major decisions made by the board of directors. In the case of a strategic buyer, even day-to-day management shifts to the control of the buyer.

PARTIAL OR 100% SALE: A private sale can be structured as a 100% sale or a partial sale. The 100% sale is the standard when selling to a strategic buyer. The partial sale option is most common with private equity investors, and is very easy to structure.

The sale of 80% or 90% of the company equity allows the business owner to cash out almost completely, yet retain meaningful ownership over the investment period. The owner/seller can then participate in the future growth of the company. These transactions are usually structured as leveraged buyouts (LBO) in which a combination of new equity, plus new debt secured by the company's cash flows, is used to finance the purchase price.