“Why do you need to wreck this company?
– Bud Fox
“Because it’s WRECKABLE, all right?
– Gordon Gekko
A common misconception among entrepreneurs (and the public) is that buyers of businesses channel Gordon Gekko on a regular basis, looking to destroy rather than build.
Nothing could be further from the truth. Buyers can often provide middle market business owners the opportunity to increase their wealth by collaborating on accelerating growth.
Buyers, whether financial or strategic, value nothing more than a great management team that can continue to operate a business, and with the right partner, see it grow to a more valuable asset than it could have before a transaction.
This mindset provides an excellent opportunity for business owners who have reached a constraint in their growth and need assistance in growing the business further. These constraints are common and can come in a variety of forms. Examples include:
- Cash: Business growth consumes cash. Many businesses reach stages in their development where the current ownership group simply can’t afford to provide enough capital to grow the company as fast as it wants to grow.
- Skills: Business owners sometimes need additional skills to grow the company further. The reason for this is that it usually does not take the same set of skills to grow a company from startup to $10 million – $20 million in revenue as it takes to grow it to higher levels.
- Shared Burden: Many clients have described to me their desire to sell as “I just want to take a vacation.” They want to share the burdens of managing a successful enterprise with someone else. They love the company and want to continue to grow it, but they just need some help.
A form of sale commonly known as a recapitalization can provide the vehicle for an owner to remove the constraints, take some chips off the table, yet still have the opportunity to reap the economic rewards of growing the business further.
In a recapitalization, the seller sells the company and receives a fair value in cash, but reinvests a portion of the sales proceeds in the company, thereby continuing to hold a significant stake in the company (often 20% to 40%). Usually, the seller stays in control of the day to day operations, but the buyer enables him to remove whatever constraints were holding the company back.
Typically, these sorts of “recaps” stay in place for three to five years, and then there is a second transaction. If the company is able to grow faster than it could have without an initial transaction, the seller can see an overall value for the company that is much higher than if he would have not sold and tried to go it alone!