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You Can't Always Get What You Want (Or Can You?)

 

John Kielich, CPA - Managing Director for Kolb+Co. M&A Advisers   email | bio 
LeAnne Foster, CPA - Senior Associate for Kolb+Co. M&A Advisers   email
August 2011

We never thought that Mick Jagger and the Rolling Stones would be such great philosophers, but then again, there were those that once questioned Aristotle. Be it a hole in one, a Ferrari, the vacation home in Aspen or whatever the "big want" is, sometimes it proves to be very elusive. The elusive want for many business owners is the "ideal" price for their company.

 Too often the ideal price for the business is what the owner determines they need (after taxes) to sustain the lifestyle they are used to or desire after the business is sold. This value might not be the same as what the company is worth to a buyer. If your ideal price is less than a seller is willing to pay you really can get what you want, but most often the real value of the company is less than the seller's ideal price. Oftentimes consulting with a good M&A adviser will help you determine if your price expectation is realistic and give guidance on how to close the gap between expectation and reality.

Assuming you are like many business owners and your ideal value exceeds the current market value for your company, what do you do? Keeping the company is an option, but if changes are not made that improve performance the gap in values will usually continue to exist. If you are willing to make changes remember that they take hard work and time to fully implement. You have to be ready to make the effort and find the right advisers to help you so you can get to your ideal price.

Another option owners can consider is partnering with a private equity firm in a recapitalization. While this article will not go into all of the details of a recapitalization or "recap" as it is often referred to, the basics are that the owner sells a portion of the company today. This can be a majority or even a minority interest, and the owner holds the remaining interest until the private equity firm sells the company, which is usually five to seven years after the first sale. The benefits of this approach (which will oftentimes lead to the owner getting what they want and more) are highlighted below.

• Assuming the first sale occurs before December 31, 2012, the owner will benefit from the current low capital gains rates. The owner gets to diversify his investment risk by taking the after tax funds and investing in other securities or vehicles.
• The equity partner may put in place an option plan that will allow other management personnel to benefit financially. We find that this is often important to the current owner.
• Since private equity firms are looking to earn high returns on their investments, the owner will find the proceeds on the second sale to be as good as or better than the first sale.

We have an illustration of the recap process that we would be pleased to discuss with you. Please feel free to contact us to set up a time to review. Getting what you want is possible. Perhaps something like a recapitalization will get you what you need. If you spend time now exploring the different options to get there, you are indeed likely to get what you want.