It’s a common dilemma for business founders: reduce personal risk, sell and move on, or invest, with a view to accelerating growth? Particularly at the moment, in a global environment without clarity or certainty, many of these choices will come down to an individual’s risk tolerance.
Anthony Poniris from Macquarie Bank’s Middle Market team says that with the right strategy, regardless of the decisions made to sell, invest, or bring in partners, you can create value for the business, and its shareholders.
The importance of continuing to grow
Nearly every successful business reaches a point where its growth trajectory slows as it matures.
That can create an apparent dilemma for founders looking to benefit from the value they’ve worked hard to build. Should they invest capital in the business to help it evolve further? Or release equity, to realise value now? Or a little of both?
Anthony Poniris works in Macquarie Bank’s Middle Market team. He says that, with a sound strategy, it’s possible to achieve both goals; creating value for the business, and its shareholders.
“Mature businesses in established industries can find it difficult to sustain consistently high levels of organic growth, as they have a level of incumbency within their existing customer base,” he says. “But for owners looking to realise meaningful value, it’s important that the business continues to grow.”
“With a defensible earnings base, and strong growth prospects you are more likely to achieve a higher valuation from a potential buyer – yielding more value for your equity.”
Tailoring a plan to your risk appetite
So how do you successfully balance business growth with personal aspirations?
Poniris says that the first step is to set clear goals, both personal and for the business: “Owners need to be clear on what they want - personal goals, wealth creation ambition, and what they want from their business.”
The balance you choose is likely to depend on your risk tolerance. “Realising business value now helps to limit downside risk in the future,” says Poniris. “However, if selling before materialising untapped potential you may miss out on the benefits of the future growth.”
After articulating business goals, if the decision is made to reduce personal risk, either by bringing in additional equity holders, or releasing all equity as a full sale, it’s important to translate them into a funding strategy, potentially using a mix of equity and debt finance to fund a payout to the business owners, or to fund the business’ growth. The right funding mix comes down to what the current and future business owners want to achieve, and what the business can sustain.
“Owners need to consider how much equity they want to retain in the business,” says Poniris, “as well as understanding how much leverage or how much debt their business can support.”
If owners are looking to remain in the business, they may still consider a partial sale to a strategic partner, to help accelerate their own growth strategy for the business; effectively sharing the risk, while still retaining equity, which allows them to benefit from future growth.
Retirement planning requires careful consideration; even more so when factoring how to value and finance a family business, particularly when considering a full or partial sale of the business to a third party or related party, such as a family member.
The need for a well-structured succession plan is especially pressing for those approaching retirement. Poniris says that retiring owners seeking to keep equity in the family often find they need help in funding their next step.
“Over the last decade, we’ve seen a lot of parents looking to pass ownership to their children. Yet often the children won’t have the financial resources to buy in.”
If contemplating sale to family or employees within the business, there’s a role to be played in financing against the business, allowing incumbent owners to realise the value that they’ve attained, while facilitating the next generation of owners.
“Debt finance can help take some value out of the business for the exiting owner, while leaving the business in good shape for the next generation of owners.”
The example is true, regardless of selling the business to a family member, or external party, but emotional drivers often complicate business decisions, made more acute at key life events.
“When setting a strategy and navigating funding options, good guidance is critical to success”, says Poniris.
“Finding key people to positively influence and assist is the key to creating value. If you can bring together an entrepreneur who knows his or her market very well, and partners who can assist in executing as the business evolves, that's where the real value is created.”
“If you're not clear around your business growth strategy, reach out to those who can help you to consider alternatives, including accountants, advisers or your bank. Banks typically have large portfolios, have seen scenarios that have worked for others, and can add value with funding structures and scenarios for acquisition or reinvestment” he says.