Exit and Growth Strategies for Middle Market Businesses

Should You Consider a Recap? Part 2

By Robert St. Germain | Mar 23, 2012

Business PlanningThis series of blog posts examines the exit options of middle market business owners as they contemplate the sale or recapitalization of their companies.  In my first post we looked at the seven primary ways owners leave their businesses – sales of assets, sale to partners, sale to children, management, employees, to the public and finally to a third party.  We now focus in on the sale to a third party.

If the seller’s primary objective is to maximize price while giving up all ownership (i.e. a complete sale) and continued employment, then “strategic” buyers should be the focus.

A strategic buyer is typically an operating company that is in either a vertical or horizontal alignment with respect to the business for sale. If it is in vertical alignment, it is either an upstream supplier to the business or its industry seeking to “forward” integrate or it is a downstream customer of the business or its industry seeking to “backward” integrate. The strategic buyer in such a case would be executing a vertical integration strategy with the goal of optimizing the production and/or distribution components of its value chain.

If the buyer is in horizontal alignment, it is either an actual or potential competitor or is in an adjacent industry.  The strategic buyer in this case would be executing a horizontal integration strategy with the goal of expanding its share of market(s).

Both vertical and horizontal integration plays are designed to reduce the costs and increase the revenues (i.e. extract “synergies”) from the combination of companies such that margins and cash flows are improved. It is these anticipated synergies that allow strategic buyers to often pay more for the businesses they acquire than financial buyers. However, strategic buyers typically purchase 100% of their acquisitions and replace the sellers with their own people post-close.

Therefore, if the seller’s primary objectives are to retain some degree of ownership, maintain employment, and possibly even receive a strategic-like valuation/price, then “financial” buyers should be the focus and a recap the means.

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Posted by Robert St. Germain.

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