Where does it all begin?
Any entrepreneurial started and run business that continues to manifest sustained and exponential growth over an extended period of time becomes a prime target for some merger and acquisition private equity activity. To the uninitiated entrepreneur, the initial approach of a private equity firm acting on behalf of interested investors can be a very flattering experience.
It is not surprising with the state of the international economy since 2008 that well run entrepreneurial businesses are prime targets. These companies tend to have tremendous growth prospects into areas where established businesses are starting to fade.
However, once a business reaches this stage in its life cycle, the entrepreneur has some critical decisions to make.
With 50% – 80% of all mergers and acquisitions not achieving their goals, you have to consider things carefully.
Factors for Consideration
- Am I able to find continued and sustainable growth initiatives going forward?
- Has my business reached the end of its growth cycle as it is currently constituted?
- Is my capital structure adequate to fund growth?
- If I did a transaction, what opportunities would it present for growth?
- Is there a cultural fit or a potential culture shock?
- Is the acquiring party bringing tangible value to what I have built?
- How would a potential transaction affect the culture of the business you have built and would it complement the objectives that you are trying to achieve or frustrate them?
All the above factors, and there may be many more, are absolutely critical to consider in this process.
All too often, the entrepreneur becomes a little intoxicated by the opportunity to take some cash off the table and the enticement of gaining some immediate value is overshadowed by the very real consequences of suddenly having an outside interest in what was previously your exclusive domain.
The most critical component in considering a transaction, which would lead to an outside interest, is having a very clear and decisive strategy behind the transaction other than the realisation of wealth.
If you had to play devil’s advocate with a transaction, could you not achieve the desired result by first exploring a revised capital structure which would incorporate funding without the sacrifice of equity? There are some circumstances in which sustained growth requires attracting outside investment and allowing the borrowing entity to take a negotiated shareholder stake in the business. But is this always the case?
If you can achieve your objectives without outside interest, this would certainly be first prize. Why would we say this? It’s simple: you have been an instrumental reason behind the success of your business and if you are competent to take it forward without an outside interest, then it is best done this way.
This leaves the unique culture and the reasons for success in tact, with the ability to achieve sustained growth. That is why the philosophy behind the liberation of any equity in an acquirer’s favour needs to have a carefully designed and conceptualised strategy, along with all the elements of the deal complementing this growth philosophy.
- Stay as you are, satisfied with your organic growth and accept the “boutique” nature of what you have built and consider your options when you no longer see your way clear to continuing with the business.
- Stay as you are, no outside interest, but with a revised capital structure if your business is capable of carrying the funding to achieve your growth objectives.
- Raise capital to achieve growth objectives and sacrifice as little as possible of your shareholding to an outside interest to achieve this.
- Consider being acquired or acquiring another business of a similar type that will allow you to achieve your growth objectives.
Critical aspect of choices
Having considered the above, not having a clear comprehensive vision of what you are trying to achieve will lead to frustration and agitation and the potential demise of a brilliant business.
Entrepreneurs are curious souls who thrive on their independence and a particular leadership style in achieving their objectives. They are often rendered challenged when placed in structured corporate environments, being confronted by the endless compliance and governance required by outside shareholders. This more often than not leads to the dampening of their entrepreneurial spirit, with the resultant lack lustre performance of a once thriving business.
There is also the culture shock of the acquiring party having to deal with the flamboyant business style of some entrepreneurs.
Therefore, it may be more desirable to pursue a pure private equity type transaction, where you attract some capital and sacrifice some shareholding (nothing more than 30%) to achieve this, rather than being acquired by a similar business that will then try and rationalise their business with yours ( a sure-fire way to end up with internal disputes).
Innocence lost never regained
Once a deal is done, your business is seldom the same. How could it be: you have outside interest to cater for. The new shareholders are passionate about having made the “right” investment; the money they have paid renders a return that is aligned to their expectation at the time of acquisition. Why shouldn’t it be? They have paid good money to gain you as well as your business, and as creative as you are, they are still anxious about their capital integrity and the anticipated return.
The entrepreneur has to face up to these changes and manage the process in a constructive way. The ideas that used to be decided in your mind must now move into the boardroom. This can be frustrating. It is clear to you, and you know it is right, but the shareholders need to be convinced. You feel it is the right way to go, however they are concerned about their investment.
All businesses have life cycles. It is an art to be able to grow your business in a sustainable way, fed by a clearly defined vision for growth and opportunity. Never be resistant to explore growth opportunities, whilst keeping your vision firmly focused on your objectives.