More than just M&A: How private businesses can realise shareholder value

| Jun 13, 2017

Entrepreneurs go into business for a multitude of reasons; to create a legacy for future generations, capitalise on a market opportunity, escape the corporate machine and regain control or to gain autonomy and freedom, to name a few.

Every entrepreneur is unique and driven by their own specific goals and aspirations. However, the one thing that all of these business leaders have in common is that they build an asset creating value that can be realised by the shareholders at a later point in time.

When advising private businesses, it is important to consider shareholders’ circumstances in parallel with that of the business, as any advice provided to the company will directly impact the owners. Unlike listed entities, in the private business arena shareholder’s circumstances can directly impact the company, so balancing personal and business issues are essential to ensure business longevity and maximum shareholder value. Some of the shareholder issues that need consideration include:

  • Succession planning
  • Management incentives
  • Realising value while minimising the risk to shareholders’ wealth
  • Shareholder rationalisation and managing minority shareholders
  • Shareholder disputes, family issues and divorce

Due to the intrinsic link between owner(s) and business, all transactions must be carefully tailored to meet both the needs of the company, and that of its shareholders. It is important to ensure that every option is considered, and the benefits and pitfalls clearly articulated to both the management team and shareholders.

The most common strategies are:

Majority sale to trade or private equity

Selling all, or the majority, of your business ultimately creates maximum short-term shareholder value, but this solution is generally best for shareholders whose goal is to fully realise their company’s value through exiting the business. This option eliminates any benefit that they will enjoy from future business growth and takes away any legacy that they may have created, as they no longer have a residual financial interest in the business. This option is good for serial entrepreneurs, or owners that are looking to retire with no other family succession. This solution may not provide the best strategy for family businesses and will need transaction specific consideration.

Partial sale

A partial sale of equity provides a good alternative, creating an opportunity for shareholders to realise a proportion of their company’s value, without relinquishing total control. This option does not allow shareholders to realise all of the available value on day one, but it does leave them with a residual interest, which lets them benefit from future growth. The key benefit being that it allows you, the owner, to continue to build a legacy, whilst maintaining some sway over the future direction of the business. This is balanced against the consideration that there will be third party involvement, which could create differences in terms of strategy and future decision making.

Initial public offering (IPO)

As with a majority sale, an IPO provides a mechanism by which shareholders can partially realise value in the short to medium term but the market is likely to require a lock-in from founding and/or exiting shareholders on their residual stake. Unlike a majority sale however, an IPO does not necessarily require incumbent shareholders to relinquish all ownership and control, allowing them to maintain an element of their remaining interest, whilst benefiting from any future growth of the company. IPOs are expensive to transact and involve a large amount of upfront work, however for the right business the opportunity can be vast and very rewarding for both its shareholders and employees. This is balanced against a market regulation requirement for extra governance and oversight, which will change the character of the business and potentially the legacy.

Debt only recapitalisation

Unlike the other three options, a debt-only recapitalisation does not involve the sale of equity. Instead, it involves taking on debt in the business to provide additional liquidity. As well as providing funding for growth and acquisition, it can also be used to extract value using recapitalisation to pay dividends up to the shareholders in order for them to realise value. Debt only solutions allow shareholders to realise a proportion of the value of their business on day one without the need to relinquish any control whatsoever. As a strategy, this allows the shareholder to crystallise and de-risk a proportion of the value of their business, whilst still benefitting from its future growth.

How will you create shareholder value?

Value realisation can be achieved in numerous ways, utilising a variety of strategies, however the one constant is that whatever route is taken, it required meticulous planning and consideration, running scenarios for every option and aligning these with the ultimate goals and aspirations of the shareholders in order to make informed and well-structured decisions.

For many, this may be the first time that they have ever embarked on a transaction of this nature and therefore to ensure maximum value is achieved, it is key that advisors are engaged early in the process; ideally 12 to 18 months in advance of a transaction to ensure all necessary preparation is in place. It is important that the appointed advisors are able to provide a cohesive full corporate advisory service in order to ensure that management and shareholders are not forced to adopt a strategy that may not provide the optimum solution for their requirements.

Contact us

Nicholas Stern

Debt and Capital Adviser, PwC United Kingdom

Tel: +44 (0)7803 456041

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