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Article Contributor: Dylan Katz

Introduction

At a Glance – Being a Business Owner in Australia

In Australia, family-run companies are the foundation of the national economy, accounting for around 70% of all businesses and employing half of Australia’s workforce, according to Grant Thorton’s Family Business Survey 2023. These companies embody family legacy, the expansion of our economy, and the entrepreneurial spirit woven together.

But at some point in these companies’ and entrepreneurs’ life cycles, thinking about an exit strategy becomes imperative. An exit strategy is more than just giving up ownership or control; it’s about ensuring the company’s principles endure and remain economically viable in a way that supports the family’s objectives and culture.

The World of Business Exit Strategies

While navigating the exit process can appear complex and intimidating, this piece will hopefully shed light on what’s available and provide enough insight to further the conversation.

This article critically analyses the various exit strategies available to family-owned businesses, each with its unique processes, implications, and outcomes. While at face value, there is no clear best exit strategy, and all mentioned exit strategies require a broad range of differing considerations – most of the specific exit strategy points are fluid. They should be evaluated through a holistic business exit planning lens.

 

From strategic sales that focus on finding aligned buyers to preserve the ethos of the business to financial sales that attract private equity firms or venture capitalists, the range of options is diverse. By the end of this piece, the reader should have gained actionable insights for their strategic pathways going forward. To maximise strategic insights, remember to reflect on how each option resonates with your business’s unique circumstances and long-term objectives.

Strategic Sale

Introduction

The first exit strategy we will investigate is a strategic sale, which can be attractive. A strategic sale involves selling a business to a buyer who sees a specific strategic fit and value in acquiring it. In most cases, these buyers will often be looking to achieve the following strategic goals:

  • Expand their market reach
  • Acquire new capabilities
  • Gain competitive advantages.

A strategic sale emphasises the core M&A principle of 1+1=3, such as synergies between the acquiring and acquired companies. The buyer in a strategic sale is typically a company operating in the same or a related industry. These buyers exhibit a clear interest in various aspects of the target:

  • Unique assets
  • Customer base
  • Intellectual property
  • Market position

This approach often aims to preserve the core values and operational ethos of the business in conjunction with leveraging the established resources and networks of the acquiring entity to facilitate growth/diversification.

The Process

The process of a strategic sale typically involves three critical steps:

  • Identifying potential buyers
  • Valuing the business
  • Negotiating the terms of the sale

In the first step, identifying the right buyer is usually paramount for a strategic sale. Achievement of this step requires a deep understanding of the market. During this stage, prospective buyers must share a similar vision/can bring added value to the business while ensuring that the legacy and ethos of the family business are respected.

Second, accurately valuing the business becomes crucial once potential buyers are identified. This valuation encompasses not just the financial aspects but also intangible assets like brand value and customer loyalty. Often, with long-standing family businesses, the latter poses the most intriguing value proposition and should be determined through extensive analysis.

The final step pertains to negotiating terms. This process consists of a delicate balance between achieving the desired financial outcome and ensuring that the strategic objectives of the sale are met. Negotiating terms can be a complex and intimidating process. Business owners must ensure during this stage that deal terms are adequately examined and deliberated alongside industry professionals such as financial advisors or lawyers.

Takeaway

Thus, a strategic sale offers a unique opportunity to pass on the reins while preserving the intrinsic values and ethos of the business, focusing on finding a buyer whose vision and objectives align with the original company’s legacy.

Financial Sale

 

Overview

The next step we will look into has various similarities to the previous exit strategy, albeit critical core differences.

In family businesses, a financial sale refers to the process where the primary motive is financial gain. Usually, transactions of this nature involve the sale of the company to parties such as private equity firms or venture capitalists.

This type of sale is particularly suitable for family businesses looking for a substantial financial return, especially when there is no clear succession plan or the current owners wish to exit the business entirely.

Private equity firms and venture capitalists find such businesses attractive due to their ability to inject capital to nurture increases in growth, profitability, and implementation of operational efficiencies.

However, one of the most important distinctions to recognise compared to strategic sales is that financial sales are less focused on maintaining the legacy or ethos of the family business. Rather, financial returns are prioritised as the paramount strategic concern pre and post-acquisition.

Execution/Key Factors

Preparing a family business for a financial sale is a critical process that enhances its attractiveness to potential buyers, primarily focusing on its financial health and operational efficiency.

This preparation often includes streamlining operations, optimising the financial structure, and ensuring all legal and regulatory compliances are in place. The points above are universal – key considerations that should be implemented across all exit strategies. Similarly, the critical aspects of a financial sale transaction process are largely interchangeable with a strategic sale.

Summary

In summary, while financial sales offer substantial monetary gains for family businesses, they often come with transformative changes in operational structure and management, marking a significant shift from the original ethos and legacy of the family-owned enterprise.

Management Buyout (MBO)

 

Overview

Management Buyouts are particularly suitable for businesses when the intention is to maintain the company’s legacy within a trusted circle of existing management. An MBO allows a company’s current management team to acquire a significant portion or all of the business, offering a seamless transition that can preserve the fundamental values and operational strategies that have been crucial for success.

This exit strategy is often employed when there are no clear succession planning processes or when the other family member wishes to step away while ensuring the business remains in capable hands.

Process

An MBO involves meticulous planning, where the management team evaluates the feasibility of the buyout, followed by securing the financing needed, which often includes loans or private equity investment. The execution phase of an MBO is complex, requiring careful coordination to ensure the continued success of the business and securing the necessary capital to complete the purchase.

A question that may arise in the reader’s mind is how is any different to a regular “financial sale” to a private equity firm?

In a typical private equity investment, the firm acquires a stake in a business to add value through various strategies such as operational improvements, strategic acquisitions, or driving organic growth. The firm typically does not seek complete control, and the current management may remain in place, or new management may be brought in to drive the desired changes.

In an MBO, however, the management team is the one that leads the buyout and will run the company post-transaction, having a significant stake in the business’s success. While the private equity firm provides the financial backing and strategic support, the critical difference is that the existing management team will usually spearhead the operation and future direction of the company.

An Exit Strategy Focused on The Future

Therefore, an MBO presents an excellent exit strategy for founders seeking to step away while also ensuring that the business passes into the hands of a trusted management team, allowing the founder’s vision and legacy to continue flourishing with a desired commitment to the company’s future strategic decisions.

Initial Public Offering (IPO)

 

Overview

An Initial Public Offering differs from the previously discussed exit strategies mainly due to its key difference in publicising the company. An IPO refers to the process by which a private company offers its shares to the public for the first time, transitioning into a publicly traded company listed on a stock exchange.

This strategy can act as a whole or partial exit strategy for family-owned businesses, providing a platform to access public capital markets while allowing the family to retain partial control if desired.

When a family-owned business goes public, it faces dual implications. On one hand, the business opens itself to greater external scrutiny and pressure from shareholders. Conversely, the business gains access to vast amounts of capital, with the opportunity to significantly expand its financial, business relationships, and strategic horizons.

Preparation

The preparation for an IPO is extensive, requiring the business to standardise its financial reporting, ensure regulatory compliance, and often restructure. These steps are critical as they provide an opportunity to align with unforgiving public market expectations. Professional advisors and underwriters are pivotal in this phase, offering their expertise to accurately value the company, prepare the necessary documentation, and create a strategy for the shares’ market debut. This process helps ensure a smooth transition from private to public ownership.

Runaway to Cash

In summary, IPO offers an effective method of accessing previously unobtainable cash levels to fund growth. However, especially for family businesses, the dilution of ownership must be recognised, and the ultimate vision and future of the business will ultimately be at the direction of the new shareholders.

Divestment of Ownership Stake

 

Overview

Our final exit strategy, a commonly used form of transaction, seeks to analyse key aspects of divesting one’s ownership stake. In partial divestment scenarios, a company sells a portion of its ownership stake, which can provide liquidity while allowing the original company owners to remain involved in the business. On the other hand, full divestment involves selling the entire stake. This effectively transfers away control from the business owner and often signifies a complete exit from the business.

Process

The divestment process begins with identifying potential buyers/investors with the interest and capacity to purchase the stake. The described buyer/investors universe usually ranges from private investors to public entities. A complex valuation follows this step to determine the worth of the ownership stake. The valuation considers the historical financials, the modelled future earnings potential, and both market conditions.

Outcome

The outcome of divestment can have a profound impact on the business structure. This can potentially lead to significant changes in governance, strategic direction, and company culture depending on the new stakeholder’s influence. Furthermore, the financial influx from the transaction can strengthen the business’s capital base, but it may also introduce new dynamics in leadership and operational management.

Therefore, it is imperative that the owner clearly define their strategic goals for the company regarding the divestiture of ownership shares. Confirm that the selected party shares these objectives and that the deal advances the company’s long-term vision and sustainability of its business plan.

Exit Strategy Conclusion

In conclusion, selecting the right exit strategy for a family-owned business is a nuanced and critical decision-making process. Each option, be it a strategic sale, financial sale, MBO, merger, IPO, or divestment of ownership stake, carries its distinct advantages and challenges.

Key To Successful Business Exit Strategy

The key to navigating these choices effectively lies in establishing clear aims and goals for the exit. Then, critically evaluate each option, understand its pros and cons, and align them with the desired outcomes. This will allow business owners to make informed decisions that not only preserve the legacy of their enterprise but also ensure its continued growth and success in the next phase of its journey.

37.4

Average return
since inception

55

Portfolio value
as at Jun-23

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