A liquidity event is not your only option

Liquidity Alternatives

A liquidity event is not your only option

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In my previous article, Preparing for a liquidity event, I discussed how to prepare a business for a liquidity event. Proper preparation ensures a business is well‑positioned when its owners encounter any unexpected events that may result in a liquidity event.

What is a liquidity event?

A liquidity event is a transaction through which corporations and/or their controlling shareholders gain financial liquidity through a sale or recapitalization of a business.

It is recommended business owners consider a number of liquidity alternatives to yield results that are optimal to all shareholders and allow them to best meet their objectives.

Shareholder motivations for liquidity

The desire for a liquidity event may be motivated by one or more of the following:

  • Business owners may wish to “take some money off the table” and reduce personal financial risk by diversifying their assets.
  • Business owners may be looking to take a step back from the business to pursue other interests or retire.
  • An unexpected personal circumstance, such as a death, deteriorating health or divorce, may require the division of family assets.
  • A shareholder can elect to leave the business due to challenging interpersonal situations resulting from mutual ownership with other individuals with different personalities.
  • Owners may be encountering increased competition and margin compression, challenging future growth and possibly throwing into question the future viability of the business.

Liquidity alternatives

A range of liquidity event alternatives exist that allow individual shareholders to realize their objectives. These alternatives include:

  • Management/employee‑led buyouts: a company is sold to its existing management or employees.
  • Recapitalizations and financial restructurings: new capital is infused into a company to facilitate growth and the partial buyout of existing shareholders.
  • Divestitures: selling a company to a strategic or financial investor that is external to the business.
  • Raising private capital: raising debt and/or equity capital to facilitate growth or ease liquidity constraints.

Characteristics of liquidity alternatives

Each of the transaction alternatives noted above has certain characteristics that make it a better option for addressing shareholder motivations and realizing shareholder objectives under specific circumstances. Some of these characteristics include:

  • Confidentiality: increased ability to maintain a higher degree of confidentiality about the transaction process and the fact that existing shareholders are looking for a buyer or investor.
  • Speed: ability to be executed more rapidly due to the familiarity of the buyer/investor with the business and the fact that the required capital for the transaction is readily available.
  • Growth & upside: certain of the alternatives allow existing shareholders to continue to retain an interest in the company where they believe considerable future growth and upside potential exists. These alternatives involve partnering with seasoned investors with access to tangible resources, experience and knowledge not available to the existing management and shareholders.
  • Price: by their nature, some of the alternatives will be directed to a broader pool of potential buyers/investors and a more formal auction process will likely be undertaken. Broad auction processes that target strategic investors are typically considered optimal from a price perspective.
  • Use of proceeds: by design, certain of the alternatives will result in existing ownership being diluted, taking chips off the table and diversifying their personal assets. Other alternatives do not necessarily (immediately) allow for these options.
  • Ongoing ownership and management: certain of the alternatives result in existing ownership severing the relationship with the company immediately while others result in continued ownership and potentially management roles going forward. One also needs to contemplate the various alternatives taking into consideration the shareholders’ comfort level with having additional/new stakeholders at the table.

Conclusion

We often find shareholders desiring a liquidity event are fixated on a particular transaction alternative. Given the range of transaction alternatives available, it behooves business owners to carefully consider all options so they can identify the alternative objectives available to them.

Informed decisions, optimized value

For more information:

Nathan Treitel
Managing Director – Valuation and Transaction Advisory
416.798.6916

NTreitel@segaladvisory.com

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