In this first installment of 5 blog entries on business transitions we will look at the different types of transitions and the implications of each. This blog series will deal primarily with business to business transitions from the seller and the buyers’ perspective. Family succession and management buy-outs will be covered in a future blog in general terms in order to provide an overview of the scope of the issues that need to be dealt with beyond the financial transaction.
In the simplest terms, a business transition is an event or transaction that results in a change in the effective ownership of a business. How can the owner of a business put their company in the best position to influence the subsequent terms of the change of ownership?
Business transition transactions can be complex. It is important to have a thorough understanding of the key elements in a successful transition.
Types of Transitions Introduction
There are a number of types of transitions including family succession, management buy-outs or a sale to a third party. The one that is best for you, in a large part, depends on your goals. Are you looking to maximize your wealth, continue the company’s legacy or keep it in the family? How much are you willing to be involved with the new owner(s)? What is your personal timeline for realizing the monetary benefits?
There are basically three types of B2B transactions; 1.Strategic; 2. Financial; and 3. Competitive.
1. B2B Strategic (1+1=3)
Business to Business (B2B) transitions, or sales to a third party, represent 50% of all business transitions.
Strategic mergers are undertaken because of a belief that the combination of the two companies will create greater synergy in the market, increased profitability and a more viable, sustainable company. Strategic mergers can be based on a wide variety of motivations including;
- Geographic expansion
- Product line expansion
- Acquisition of new technology
- Increased visibility in the market
- Change in the core focus of the buyer’s business
- Acquisition to secure supply chain
2. B2B Financial (1+1=2)
Financial mergers will create directly measureable changes to the buyer’s financial position through the consolidation of “acquisition co” into their existing company. As a larger entity, there are other potential opportunities that may become available because of a stronger financial statement, such as;
- Increased revenue and earnings
- Access to new markets
- Access to capital
- Greater economies of scale
- Increased purchasing leverage (buying power) within the supply chain
It is not always the case that the above opportunities are realized. There are a great number of factors involved in the integration of two businesses, two management teams and staff, new products and services and the meshing of two different business cultures.
Confidentiality during the negotiations is difficult but mandatory. Equally as important is the post integration planning, including clear communications with all major stakeholders and the public.
3. B2B Competitive (1+1= .5)
A competitive transition can be friendly or hostile. It can have strategic and financial motivations but effectively it results in the elimination of a competitor from the marketplace.
Competitive Sale: Friendly
A friendly transition occurs when an offer to acquire a competitor is favourably received, either because the owner of the selling company has reached a plateau in the ability of the company to grow, or he/she is advancing in years and wants a quick exit, or there are strong mutual characteristics of vision, culture and style between the two companies. The result may be an increase in market share for the buyer but little else in terms of real strategic or financial value.
One of the dangers of a friendly competitive offer is that the price and terms being offered will probably be lower than what is available if the business was brokered in the open market. It is strongly recommended that the seller engage a trained M&A professional advisor to conduct a confidential scan of the marketplace to ensure they are realizing the maximum price available for their business.
Competitive Sale: Hostile
A hostile competitive bid is usually strategic but not always financially well planned. The objective is to do what must be done to remove the competition from the marketplace. The process typically starts with an unsolicited offer from the seller which is deemed by them to be based on a valuation higher than would be available from other buyers in the open market. If the seller rejects the offer, and the acquiring company is insistent on pursuing the company through a higher offer, appeals to other partners and management or through public relation channels in the marketplace, the process takes on a more hostile tone and puts pressure on the owner to come back to the negotiating table.
Similar to the recommendation for the friendly transition scenario, it is important for the owner to engage with an M&A professional who can act on their behalf at the negotiating table, gauge the interest in the open market for other buyers, or work with the owner to devise strategies to defend themselves against the hostile buyer.
If you have any questions or would like to have a discussion of where you and your company are in terms of readiness for a business transition, please contact us.