Some years ago, I worked with the board and owners of a mid-size business which had the opportunity to expand, and had several funding options available. At the same time, we also considered the implications of outright exit. Adding to the issues was the realisation that the status quo wasn’t a long-term survival option.
This table summarises the discussion of the pros and cons of the options:
Obviously this is a gross over-simplification of the alternatives, and was in the context of the structure and behaviours of their industry.
We explored each alternative in terms of complexity, risk, growth, the impact on shareholder value, and perhaps most importantly, the appetite of the owners for the next stage of the journey. This led to the conclusion for these owners that their first preference was to seek a financial investor for expansion, with an exit strategy based on a 100% trade sale within 5 years. If no acceptable financial investor could be found within 12 months, then the business would be put up for 100% trade sale, while it still had the market expansion opportunity.
Now that wouldn’t necessarily be the conclusion for every business, e.g. Xero went for an IPO as its primary expansion capital funding mechanism. The point is that you shouldn’t make a quick assumption about how you should fund your business expansion or, indeed, if you should expand at all.
First posted February 26th, 2008
This table summarises the discussion of the pros and cons of the options:
Investment stage | Expansion | Exit | ||
Investor type | Pro | Con | Pro | Con |
Self-funding | No transaction cost You’re still involved | Miss rapid growth opportunity Too small for long term viability You’re still involved | NA | NA |
Trade investor | Access to markets, channels, know-how Patience Grows the pie faster You’re still involved | Exclusive distribution Limits on additional investors Pre-emptive rights diminish exit choices and value You’re still involved. They want a future strategy - often 100% acquisition | Highest potential exit value | Loss of your baby and what you’ve built |
Financial investor | You’re still in charge – if you perform Ability to bring in additional investors You’re still involved | No access to channels, markets, know-how Impatience They can sell their stake to a competitor You’re still involved They will want an exit strategy - often 100% sale within 5 years | Your baby keeps going | Unless you’re a stable business, not the top value |
IPO | Access to bigger capital pool Freedom of action (within public co limits) Retained control (as manager and major shareholder) You’re still involved | Public scrutiny before you’re really ready A competitor can build up a stake Cost of servicing many investors Transaction cost Fickle investors You’re still involved | Good potential for value Your baby keeps going | You will still be locked in Transaction cost Less viable for smaller businesses |
Obviously this is a gross over-simplification of the alternatives, and was in the context of the structure and behaviours of their industry.
We explored each alternative in terms of complexity, risk, growth, the impact on shareholder value, and perhaps most importantly, the appetite of the owners for the next stage of the journey. This led to the conclusion for these owners that their first preference was to seek a financial investor for expansion, with an exit strategy based on a 100% trade sale within 5 years. If no acceptable financial investor could be found within 12 months, then the business would be put up for 100% trade sale, while it still had the market expansion opportunity.
Now that wouldn’t necessarily be the conclusion for every business, e.g. Xero went for an IPO as its primary expansion capital funding mechanism. The point is that you shouldn’t make a quick assumption about how you should fund your business expansion or, indeed, if you should expand at all.
First posted February 26th, 2008