Increasing number of sale options available to companies

By David Thomas, Cascade Partners

Thesis: Selling a company doesn’t have to mean giving up 100% of your ownership. There are more alternatives than ever that allow owners to minimise equity transfer.

As it becomes clearer to shareholders that selling and liquidity are not one in the same, more and more company owners are exploring options that go beyond traditional transactions.

Imagine this: two brothers inherit the family business from their father. Over time the two decide to go in separate directions. One wants to grow the company and the other wants to exit and travel the world. While traditional exit options might include selling the entire company and losing control, alternatives are available to owners.

A dividend or minority recapitalisation – where a financial investor or lender provides debt and may acquire up to 45% of the equity – would allow one of the brothers to remain in control of the business. The selling brother would get a third-party valuation rather than a discounted internal value. Similarly, assuming their business has reasonable cash flows, a lender may feel comfortable loaning the company multiple cash flows which could be paid out in cash to the brother who wishes to exit for little or no equity. The business would then use its cash flows to repay the lender.

With USD 250 billion in debt and USD 1.5 trillion in equity waiting to be put to work, an increasing number of investors are trying to figure out how to deploy the massive capital overhang that’s out there. As a result, there’s been an increase in the willingness to pursue alternative investments like minority recapitalisations, something that’s appealing to those in the middle market.

According to Pitchbook, the number of globally completed recapitalisations (including leveraged and dividend) in 2020 was 378. This year, 2021 is on track to outpace the prior year with 253 recapitalisations completed as of July.

How to grow a company and understanding available exit options all need to be considered when structuring a deal. That’s why M&A is about more than just the financial side of a transaction; it’s about people and business.

Published: M & A Newsletter, No. 01 Autumn 2021 l Photo: Thanasarn - stock.adobe.com