Stephen Rossi
It’s no secret that deal professionals and business owners still have a less-than-rosy dealmaking perspective so far this year, especially around sellside M&A. High interest rates and global macroeconomic headwinds persist, continuing to depress valuations across many industries. You might want to exit even so, but it’s not necessarily prime time to sell a company if you’re a business owner looking to cash out of a personal asset you spent decades building.
The economic climate remains volatile. Personally lucrative business sales can still close successfully of course. But middle-market company owners in every industry have other options besides selling outright to see financial gain. This uncertain period can be an opportune time to explore alternate creative transaction structures for a business that can draw significant operational and financial benefits down the road. It is like trying to sell a house in a down real estate market. Sales can and do still happen, but in the near term, an owner’s time is often better spent initiating home improvements, like updating kitchens and bathrooms or constructing new spaces, carefully positioning a home to win higher and better values when housing prices swing back upward in the seller’s favor.
Taking a Step Back and Investing in Long-Term Success
Like homeowners, business owners have several strategic pathways and transaction types they can consider to maximize value now, even if they want to delay an ultimate exit. This varies depending on the proprietor’s specific goals, how long they are ultimately willing to wait for broader macroeconomic or industry-specific economic conditions to improve before selling, and the financial flexibility and deal acumen of other entities such as lenders involved in these alternate transactions. Successfully closing deals is often a delicate dance with multiple parties involved, such as investment bankers and specialty lenders within the private credit industry.
In this uncertain economy, alternative strategic options could include seeking growth financing to expand organically or via bolt-on acquisitions, refinancing existing debt to improve a company’s capital structure and liquidity profile to improve financial flexibility and performance, or a dividend recapitalization enabling a founder to reap some financial upside today without diluting equity or ceding control.
Strategic transactions like this can fine-tune a business while the M&A market is less than ideal and bring long-range benefits. For instance, a company seeking growth capital to acquire several smaller competitors scales up, gaining market share and improving Ebitda, thus boosting valuation to potential buyers in a sale.
Four Requirements For a Successful Strategic Alternative Deal
Successfully executing a strategic alternative deal requires several things:
Deal professionals must think outside the box and creatively structure their deals.
Smart negotiation must play out between different parties: the target company, all relevant stakeholders, attorneys, other financial professionals like tax advisors, and other parties like specialty financiers.
Familiarity and reliable contacts within the private credit industry are required, especially if multiple tranches of debt end up in play. Traditional lenders, like commercial banks, possess more stringent lending requirements and may be reluctant to participate in more intricate transactions, especially involving higher leverage turns on Ebitda.
Business owners seeking to execute a strategic alternative deal instead of an outright sale should be prepared to stay on for a number of years still. Specialty lenders performing middle-market financing typically structure loans with a maturity of around four years. A company owner should have sufficient drive to maintain business growth in this period, servicing new debt incurred and overall follow through to the final exit, even if that is several more years away.
When Palm Tree recently engaged in a similar transaction for a founder-owned business, we accomplished several objectives for the company:
- Refinancing debt to strengthen the capital structure
- Securing growth capital for acquisitions
- Providing a dividend payout to the owner
Working with a business in the consumer products space, the deal involved refinancing an existing lender arrangement and approximately doubling the total facilities available to the business. This granted the company an expandable credit line via an accordion feature, enabling the business to close on several more add-on deals to increase in size. It also included a sizable dividend payment to the shareholders, allowing them to derisk themselves and diversify their personal holdings. These moves allowed the business to secure several more add-on opportunities to gain scale, product diversification and increased market presence, boosting expected valuations in a future sale. A consumer-focused business was involved in this particular case, but this approach is industry agnostic and applicable to companies in all sectors.
In this uncertain period, as a business leader, it’s prudent to consider alternative strategic actions you can take to strengthen your company. Of course, if now is the right time for you and your business to run a full sell-side process, it’s certainly possible to garner an excellent price, and a good advisor should be able to accomplish this, no matter the economic conditions. Decide to delay? You have other choices. Instead of passively waiting out these choppy waters, weigh your options and take active, concrete steps to improve your company. Owners who persevere, maintain long-term vision for their businesses and utilize alternative transaction structures like these to their advantage through the year’s murky M&A outlook will reap the upside on the inevitable rebound.
