Non-Control Investments: Potential Owners' Exit Strategy

    Sometimes, a sellers’ market alone is not a good enough reason for an owner to exit their business.  Even amid market conditions supporting elevated valuations, there could be several issues influencing the owners’ preference to delay the sale of their business, but at the same time satisfying their desire to create some liquidity now.   

    Beyond the business owner’s hopes for continued success of the company, the value and financial structure of the enterprise may have important implications for his or her own retirement picture. And many owners in today’s environment of working longer may not want to retire just yet, but would nonetheless like to get some liquidity out of the business.

    With issues arising such as business strategy, potential successors still coming of age, and the owner’s activity preferences, a non-control investment transaction could figure into a owner’s exit considerations.

    Minority stakes offer flexibility

    Non-control transactions involve the investor taking a minority stake in the company in return for other features of the deal that will help raise the investment’s yield or perhaps make it a better fit for a private equity niche. Those same considerations can help tailor the deal specifically to the owner’s personal preferences and goals. 

    The effect of current and anticipated market conditions on company valuations will always make it worthwhile to consider a non-control transaction. After years of increasing valuations, near-term market conditions may be less favorable than the long bull market that’s run for nearly the same period of time. With valuations probably falling rather than rising, non-control deals could become attractive.

    If the business owner is contemplating a straight sale but finds the offers don’t meet expectations, a non-control transaction can be used to delay the sale until the market improves, while giving sellers the liquidity they seek. 

    Something for both sides

    The investor in such a transaction needs a return on capital over a fixed period of time. The company involved may offer growth and profitability prospects attractive enough that the private equity shareholder bets the minority stake can be valued at a future date to hit the required return. Alternatively, the deal may be structured to give the investor warrants that would offer majority control at the future date. 

    For the seller, the alternative to a sale or minority interest transaction aimed at providing liquidity for retirement objectives would be to take on a senior debt obligation. This would affect the company’s future operations because of the cash flow and balance sheet fallout. 

    Not incurring any additional debt makes the company more attractive for the investor because it will enhance targeted revenue and earnings before taxes, interest, and depreciation, both variables that would be in the minority shareholder’s calculations on the deal’s expected return.

    A non-control deal also may be of interest to the owner who’s mulling retirement and would like to keep the business in the family, but whose children are still some years from being able to take over. Depending on the business sector in which the owner is operating, a minority share investor may offer related expertise that would help ensure a smooth succession. This scenario also frees up time for the owner so he can step gradually into his retirement situation. 

    Non-control investments aren’t for everyone, as they depend on just the right circumstances existing for both the business owner and the investor. They nonetheless offer options for the potentially retiring business owner beyond a straightforward sale.

    Subject matter expertise

    • jeremy swan
      Contact Jeremy Jeremy+Swan
      Jeremy Swan

      Managing Principal - Financial Sponsors & Financial Services Industry

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