This article, written by Bryce DeGroot, was originally published in the Montana High Tech Alliance newsletter.
Entrepreneurs are visionary leaders who are driven by ideas and execution. They are intensely devoted to building their company. It should come as no surprise that most business owners spend little time planning for the inevitable fact that they will someday exit their company.
The decision to sell a company or a share of equity can be driven by personal goals such as retirement, the need to free up time or capital for the next venture, or business strategy.
The best exit strategy weaves together the company’s growth strategy and long-term exit planning into an outcome that maximizes value and achieves the shareholder’s personal goals.
Among all industries, high tech and manufacturing companies are some of the most attractive companies to acquire. They have unique value drivers such as high relative growth, high profit margins, proprietary products, scalable business models, and national or international customer markets.
These collective characteristics tend to bring a larger number of buyers, stronger risk/reward profiles, and higher valuations, as compared with the overall population of companies.
Montana has long been known as a tremendous place to live, but with increased attention on high tech and manufacturing businesses, it is also seeing an increase in investor interest. Let’s explore the type of investors that are acquiring Montana companies and what exit options are available. I’ll include some real examples of recent transactions that we handled for Montana companies.
Individual Entrepreneurs commonly use their own capital or debt/equity financing to acquire a company. A common case is an industry veteran who is looking for the next venture.
An example is an entrepreneur who acquired a Montana marketing firm and then grew revenue 30% in the first year. In this case, the buyer was seeking financial returns and the lifestyle of operating a Montana company.
Private Equity investors are disciplined investors who make investments in established private companies with the goal of generating returns for their investors through earnings and value growth.
An example is a $1 billion private equity fund that acquired a Montana precision manufacturing company with the goal of scaling the proprietary products to national/international markets. They maintained the Montana operation and they plan to grow with new jobs and increased production.
Private equity financing can provide the opportunity to sell a stake in the company in exchange for growth capital or shareholder liquidity. Any retained equity provides the opportunity for a “stage two” exit down the road at a higher valuation.
Strategic Buyers are commonly companies who are acquiring as part of their growth strategy. The buyer is often seeking new customers, products, technology or geography.
We recently handled a transaction with a public “Fortune 10” company that acquired a Montana company for strategic reasons – obtaining their proprietary products and sticky customers – while growing the workforce in Montana.
Internal Successors include employees and family members. Management buyouts are an option when there is a strong or highly integral management team. Outside investors can support the managers to provide cash to the exiting shareholder(s), while leaving management with partial or full ownership.
Family successions are prevalent in stable mature companies with family management talent. With the right talent, a family succession can provide an enduring family legacy. Family successions must be carefully planned, as there is a decreasing success rate with each successive generation of ownership.
In addition to the options mentioned, the array of exit options includes an IPO, an ESOP and several other transaction structures. A company’s unique value drivers and situation will determine their exit options.
Montana’s future is bright. High-tech and manufacturing businesses are already playing a crucial role in that growth and will undoubtedly continue to do so. By planning ahead, shareholders can reach their financial and personal goals in a graceful exit, as well as ensure their company continues to have a positive impact on the local and state community.
Bryce DeGroot is the principal of Compass Advisors, a merger and acquisition advisory firm based in Bozeman. The firm handled $35 million of business exits for Montana entrepreneurs last year. Compass Advisors recently published their 2016 Private M&A Market Report, which can be found at www.compass-advisors.com/2016-ma-report.