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When you are ready to exit, selling your company now may not be prime time due to economic conditions and high interest rates. If you are a business owner looking to cash out of the business you spent decades building, consider the following.
Even when the economic climate is volatile, lucrative business sales can close successfully. However, middle-market company owners in every industry have other options besides selling outright to see financial gain. Uncertain periods can be an opportune time to explore alternate creative transaction structures for a business that can draw significant operational and financial benefits. It is like trying to sell a house in a down real estate market. Sales can and do still happen, but in the near term, an owner’s time is often better spent initiating improvements.
Taking a Step Back and Investing in Long-Term Success
Like homeowners, business owners have several strategic pathways and transaction types they can consider to maximize value now, even if they want to delay an ultimate exit. These pathways vary depending on the proprietor’s specific goals, how long they are willing to wait for broader macroeconomic or industry-specific economic conditions to improve before selling, and the financial flexibility and deal acumen of other entities, such as lenders involved in alternate transactions. Successfully closing deals is often a delicate dance with multiple parties involved, such as investment bankers and specialty lenders.
In any uncertain economy, alternative strategic options could include growth financing to expand organically or via bolt-on acquisitions, refinancing existing debt to improve a company’s capital structure and liquidity profile to improve financial flexibility and performance, or a dividend recapitalization enabling a founder to reap some financial upside today without diluting equity or ceding control.
Strategic transactions like this can fine-tune a business when the M&A market is less than ideal and bring long-range benefits. For instance, a company seeking growth capital to acquire several smaller competitors scale up, gaining market share and improving EBITDA, thus boosting valuation to potential buyers in a sale.
Successfully executing a strategic alternative deal requires several things:
- Deal professionals must think outside the box and creatively structure their deals.
- Smart negotiation must play out between different parties: the target company, all relevant stakeholders, attorneys, other financial professionals like tax advisors, and other parties like specialty financiers.
- Reliable contacts within the private credit industry are required, especially if multiple debt tranches exist. Traditional lenders, like commercial banks, possess more stringent lending requirements and may be reluctant to participate in more intricate transactions, primarily involving higher leverage turns on EBITDA.
- Business owners seeking to execute a strategic alternative deal instead of an outright sale should still be prepared to stay on for several years. Specialty lenders performing middle-market financing usually structure loans with a maturity of around four years. A company owner should have sufficient drive to maintain business growth in this period, servicing new debt incurred and overall follow through to the final exit, even if that is several more years away.
A strategic alternative should seek to accomplish several objectives for the company:
- Refinancing debt to strengthen the capital structure
- Securing growth capital for acquisitions
- Providing a dividend payout to the owner
In a hypothetical transaction, refinancing an existing lender arrangement could result in doubling the number of available facilities. Refinancing may grant the company an expandable credit line via an accordion feature, enabling the business to close on several more add-on deals to increase in size. It also could include a sizable dividend payment to the shareholders, allowing them to risk themselves and diversify their personal holdings. These moves could allow a business to secure several more add-on opportunities to gain scale, product diversification, and increased market presence, boosting expected valuations in future sales. This approach is industry-agnostic and applicable to companies in all sectors.
In any uncertain period, it is prudent for a business leader to consider alternative strategic actions to strengthen the company. Of course, if now is the right time for you and your business to run a complete sell-side process, it is certainly possible to garner an excellent price, and a good advisor should be able to accomplish this, no matter the economic conditions.
Decide to delay? You have other choices. Instead of passively waiting out choppy waters, weigh your options and take active, concrete steps to improve your company. Owners who persevere, maintain a long-term vision for their businesses, and utilize alternative transaction structures will reap the upside on the inevitable rebound.
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