One of the most asked questions when considering the sale of a business is how to find a suitable buyer. Naturally you want to consider all of your options to make sure that you maximise the sale price.
You’ll also most likely be concerned about going to the more obvious candidates straight away, as this can often provide market information to competitors that can be damaging.
You’ll also be wary of alerting customers, suppliers and employees of an impending sale, and hence confidentiality whilst sounding out the market is paramount.
Included below are some of the options that you can consider, usually through an M&A advisor to add another layer of confidentiality, and some comments on the merits or otherwise of each.
1. Competitors looking to expand product/market/team/profits
Often the most obvious candidate to buy your business is the one that can cause you the most problems in the market.
Competitors will understand your business and the market you operate in, and also appreciate the value of your company – especially where such an acquisition delivers synergies that can boost combined profits.
Approaching competitors can also have its downside – especially when a sale transaction does not proceed.
Armed with the knowledge that your company is for sale, the competitor could use the information to their advantage, and without necessarily breaching a confidentiality agreement. This must be considered before going down this route.
2. Companies looking to vertically integrate – up or down
Companies looking to vertically integrate might include your suppliers looking to enhance the value of their product offering, or your customers looking to include the profit margin from their own suppliers. Although not as common as a competitive buyer, if such a buyer can be found they are generally favoured over a pure competitor. Confidentiality is less likely to be an issue as such buyers would not want to damage an existing relationship.
3. Companies looking to enter a foreign market or get a national presence
Finding a buyer that is looking to enter your market can be extremely attractive, but you may need the services of an M&A advisor with a good international network to unearth such a company.
Confidentiality is likely to be less of an issue, and a much higher multiple may be applied to profits from, say, either a European or US buyer.
On average, listed PEs are some 40% higher than South African PEs in these markets, and this disparity remains even when PEs are discounted down to private company multiples.
4. High net worth individuals or teams
Another interesting group of buyers are high net worth individuals or teams that have either their own money, or significant backing, and a desire to enter an industry such as yours. This often includes individuals with considerable business experience that is relevant to your industry.
On the upside, confidentiality is much less likely to be an issue. On the downside, you may not be able to negotiate the same exit value for your business as you might from a competitor desperate to get a strategic advantage or an international company applying a higher multiple.
Related: ‘Business As Usual’ Could Ruin You
5. Management buy-in (MBI) teams
MBI teams are similar to the above, although they will generally have specific experience in your industry and the support of either a VC or private equity (or occasionally private backer) rather than their own cash. Their valuations are likely to be similar to the high net worth buyer.
6. Management buy-out (MBO) teams
Another favoured candidate in any sale are the company’s management. Although unlikely to offer the best price for your business, the owner is often very keen to give management the option to buy the business they have been working in for a number of years.
If this route is considered, the owner will probably need to provide some assistance to management to get an MBO done, either by guiding them to a private equity firm that can provide some finance (and package the remainder from debt or other mezzanine or equity providers), or by providing vendor finance to make up any shortfall (that is, leaving some of the consideration in the business to be paid out when cash flows allow).
7. Companies looking to do a roll-up (with PE backing)
Individuals or companies looking to do a roll-up are not common, and probably will only be introduced to you through an M&A advisor.
A roll-up is where an individual or company attempts to buy a number of similar or complementary businesses in an industry, and then combine them to extract operating synergies, usually ahead of a listing at a higher multiple.
Prices here can be quite favourable, especially where the industry exhibits a good listed multiple, but these transactions can come with the added complications of the vendor being part of a larger group prior to ultimate exit.
8. Companies forming related conglomerates
Similar to a roll-up are companies looking to buy more loosely related businesses — often with vertical integration as one of the aims. Such buyers are generally listed companies looking to achieve arbitrage between the private multiple they can offer, and the listed multiple that will then apply to the target’s profits.
Synergies between operations can also extract additional profits to which the listed multiple can be applied. Valuation can be as good as in a roll-up, and there is the advantage of some of the consideration being available in listed shares with growth potential.
9. Private equity firms (not always 100%)
Private equity firms are always in the market to buy profitable, established private companies — often with the promise of bringing capital and their network to the table to greatly enhance value if an earn-out is part of the transaction.
Whilst up-front consideration may not be as high as from other buyers, if the PE firm is as good as their word, the ultimate consideration that the owner receives can easily meet or exceed his expectations.
10. Other options
Apart from the potential buyers that can be found above, there are other options available, such as:
- Take in investment capital, grow the business and then exit at a later date (trade sale or listing)
- Sell part of the business that buyers want, and retain the rest.
- Go for a listing yourself.
As an owner considering the sale of your business, there are often many more options than you might initially consider — and each with a different set of outcomes as regards value, confidentiality, and structure. It’s important to match the right set of buyers with your aspirations to ensure the best result.
Far too often, buyers approach M&A advisers when they have been approached by a single buyer (often a competitor), and become committed to a deal before considering all other options.
It’s far better to plan for an exit months or years before a sale transaction, and define the non-negotiables required from any deal. This way, you can make sure that you only speak to buyers likely to deliver these non-negotiables, and pro-actively approach them when the time is right.
Needless to say, multiple suitors for your business will undoubtedly lead to a better price than one candidate, but to manage such a process takes considerable skill.
Are You Struggling To Find Financing For Your SME? Try Alternative Finance
If you don’t qualify for traditional funding or if it isn’t the right fit for your SME why not explore alternative funding? We specialise in alternative financing options by providing in-depth and custom plans for you and your business needs.
- Call: 011 886 0922
- Visit: www.spartan.co.za
Alternative Finance is finance beyond the traditional – it is defined by the financiers’ area of specialisation – by what they specialise in, whom they serve, and how they provide their funding. It does not replace traditional finance but rather functions as a complementary and additional form of funding.
Alternative financiers are specialists – they focus on a particular need and on a specific audience. As a result their ‘how’ is customised to deal with their chosen target market and for this targets unique needs. This applies to the funder’s processes and to their level of flexibility around things such as collateral.
An example of this is that a SME may have an existing R1 million overdraft (their traditional finance) secured by R 1.5 million collateral but suddenly they need R5 million for some kind of contract or bridging finance – they need it fast and don’t have that extent of collateral.
The traditional funder cannot provide what they need, their process is too long and their flexibility is too low. An alternative financier providing bridging finance and specialising in SMEs is ideally positioned to fill this gap.
One of the most significant differences between a traditional funder and an alternative financier is in their process. In the case of the alternative financier, they have often chosen to deal exclusively with a particular customer base, for example SMEs. As a result, this funder has both an affinity and contextually relevant empathy in working with SMEs.
Not only do they speak the same language the funder also has an appreciation for the time and material constraints of the SME and has developed their processes to cater to this market. This applies most notably to the turnaround time of the funding need and to the assessment aspect – where flexibility around things such as collateral is vital in making the finance happen for the SME.
A traditional funder is unable to meet the deadline of a bridging finance need, submitted on an urgent basis, where the finance is needed as soon as 2-3 days from time of application. A specialised or alternative funder is able to do exactly this. A traditional funder is also unable to find creative methods in solving the SMEs lack of high-value collateral in applying for finance.
This SME has generally already used their high-value collateral for traditional credit facilities but now needs funding for growth or resolution of a temporary cash flow challenge. An alternative financier is able to look at such an application in a different way, and has most likely already established alternative ways to make this happen for the SME.
Ways To Raise Capital To Expand Your SME
John Whall shares some of his insights about raising capital, despite tough economic conditions.
Times are tough, we all know that. As revealed earlier this month by StatsSA, South Africa is in a recession. But as history tells us, recessions don’t last forever and as a business owner you need to stay focused and continue to look for ways to grow your business, because business growth means economic growth.
John Whall, CEO of Heartwood Properties has been in the business of commercial and industrial property development for many years. He has experienced more than one recession in his professional career. In order to expand, companies can raise capital in two main ways, through debt or equity. Debt involves borrowing money, while equity means to raise money by selling shares in the company.
Whall shares some of his insights about raising capital, despite tough economic conditions.
Bank funded expansions are a very common option for many SMEs. The one thing you must consider is that it could limit you in terms of how much you can borrow based on your credit history and available assets. You will also be liable for repaying the full loan plus interest. Right now, interest rates remain the same, but it may increase in 2019. Debt if used correctly and not to aggressively is a great way for SMEs to grow and expand, however debt should always be used conservatively and the business owner must ensure that the cash generated by the business can easily repay both the interest and the capital to the bank.
The South African government supports a number of funding programmes to encourage the growth of small, medium and micro businesses in South Africa. You can contact Department of Trade and Industry (DTI), SEFA, NEF, Khula Finance Enterprise.
Used in the startup phase mainly, this form of financing uses your network of friends, family or acquaintances. The Internet is used to spread the word about your campaign to reach larger amounts of people. Equity-based crowdfunding has become a popular alternative for startups who don’t want to be dependent on venture capital investors. This has proven to be very effective in developed markets.
If you require more capital than you can raise or borrow yourself, and you want to avoid aggressive debt funding then you may want to consider equity funding. This can open up a number of avenues that will offer you capital to grow your business. Very popular amongst startups are angel investors and venture capitalists.
Angel investors are people (business owners) who contribute their time, expertise as well as their own personal finances and in return expect to own a share of your business and receive a share of any future profits.
The opposite are venture capitalists and private equity investors, who are investment companies or fund managers who provide very large sums of cash in return for part-ownership. These type of investors do usually have a say in the management of the business and also agree to a five to seven year exit plan for their investment. This type of funding suits a business who needs a once off equity investment, but does not continuously need to raise capital to grow the business. The election of the investment partner is critical for the business owner and their medium to long-term strategy for the business must be aligned.
Established businesses usually do a public listing to raise ongoing capital in hope of expanding. Not only does this help to strengthen their capital base but it makes acquisitions easier, ownership more liquid for shareholders and allows the business to continuously raise capital to grow. Up until two years ago, the only option for a company to list publicly was through the Johannesburg Stock Exchange (JSE), which required a minimum capital amount of R500 million for a primary listing.
In 2017, the Financial Sector Conduct Authority (FSCA) issued four new exchange licenses in South Africa, all of which are already operational, which is not only providing an alternative to the JSE but is also offering opportunities to smaller businesses and driving down the costs of listing and share trading. One of these new exchanges is the 4 Africa Exchange (4AX) whom Heartwood Properties is listed with. They are the only exchange apart from the JSE which is licensed to trade across all asset classes, including both equity and debt as well as special-purpose vehicles and real estate investment trusts.
4AX is ideally suited for unlisted companies with a market capitalisation of up to R10 billion wishing to list. This, however, is not to say that this is a ceiling on the size of the company seeking a listing. The exchange has aimed to make the listing process more streamlined and timely while fully complying with its licence and the prevailing legal framework. Its listing requirements are less onerous and more cost effective than listing on the JSE, making it a viable alternative for smaller and medium sized companies. The other exchanges to consider include: ZAR X, A2X, and Equity Express Securities Exchange (ESSE).
Why Your Start-up Should Skip The Seed Round
Don’t tell your frugal grandpa, but these days, you can’t do much with the typical $2 million seed round.
When enterprise cloud start-ups meet with us, one of the first questions we ask is: How much capital do you need?
The companies we meet with are typically pre-product with small teams, around two to 10 people. They almost invariably say they need a $2 million seed round, for the simple reason that, today, just about all seed rounds are $2 million.
Our next question is: What can you accomplish with $2 million? If they’re honest, they’ll say, “Not enough.”
We then tell them that we agree. In our experience, $2 million is a little light. At this point, more often than not, they’ll breathe a sigh of relief and say, “Yeah, by our calculations we really need $5 million to get to the next stage.”
So, this raises the question: Why even raise a seed round?
Don’t tell your frugal grandpa, but these days, you can’t do much with $2 million – not in the enterprise cloud realm, anyway. These companies are attempting to build very important products for the enterprise. They are trying to solve weighty problems for business, and getting to their first product offering requires the help of experienced, high-quality engineers who (news flash) do not work for free. There are also early sales and marketing challenges that these start-ups need to get right.
And yet, so many start-ups are still stuck on the $2 million seed round. That’s what the market expects, so that’s what they’re conditioned to ask for – instead of the larger amount that they really need.
We need a rethink here. In fact, there is no longer a Classic Series A market. That’s because the capital requirements for today’s enterprise cloud companies are a lot different than they were 15 years ago, when cloud companies first burst onto the enterprise computing scene.
In theory, new cloud companies need a lot less capital to get off the ground due to lower upfront startup costs, cheaper technology and a wider range of distribution options. OK, fine. But it’s still hugely important to get the right pieces in place and build a solid foundation. And no matter what anyone says, that does not come cheap.
So, how much is the right amount? For early stage cloud business application companies, we believe the real capital requirement is about $5 million. That’s how much you need to hire seasoned executives, prove out an acceptable level of customer success and really start to refine your customer-acquisition model.
But here’s the other problem: The traditional Series A firms are now so large that they need to put much more money to work – a minimum of $10 million. So, that sweet spot between $2 million and $10 million is not really being addressed in the venture world.
And it needs to be addressed. Today you have that headless syndicate of $2 million to $3 million seed rounds composed of 12 different angels and a few seed funds that have already invested in 70 other startups. This is not a great situation for startups. After all, most of these investors aren’t signing up to provide hands-on advice or help with the hiring of key employees.
Plus, $2 million is just not enough capital to build out a product and team that’s ready for prime time. For enterprise cloud startups, the seed round is simply not that effective or efficient.
So, what’s the solution? My advice is to simply skip the seed round.
That’s not to say there isn’t a place for seed funds and angels. Of course there is! In fact, as a managing partner at a Classic Series A firm, I welcome these investors, because they can play a critical role and add extremely complementary value to the Classic Series A syndicate.
At the same time, they also understand that $2 million is not sufficient for today’s cloud startups. We want leading seed firms and value-added angels to join us as co-investors so they can avoid the headless syndicate syndrome and help provide cloud startups with the capital the really need.
Related: 10 Tips for Finding Seed Funding
The reality is that today’s venture capital market is not really optimised for early stage enterprise business companies. At one end of the spectrum, seed investors are not in a position to provide the long-term capital or board-level support that startups need.
At the other end, traditional venture firms have grown in size and have raised progressively larger funds. As a result, they are looking to write bigger checks of $10 million and above. That means they require startups to have a considerable level of traction and be further along in their development before making an investment.
This is why we need a return to Classic Series A investing.
What the market really needs are venture capital firms that are truly built for early stage investing, and that are led by seasoned operating partners who themselves have been entrepreneurs, who are connected to the top players in the cloud market, and who can provide that kind of insight and advice needed to build global, category-leading companies.
More than ever, enterprise cloud companies need honest-to-goodness Series A investors that can help them accelerate growth and maximise their true potential.
This article was originally posted here on Entrepreneur.com.
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