Whilst the ultimate intention might be to sell 100% of a business, there may be circumstances for an entrepreneur where a full disposal process is not the best option.
The one common goal shared by most shareholders is to maximise the value realised from a disposal process. However, it may be too early for an entrepreneur to sell outright for lifestyle reasons with the likely outcome being to also retire from the business. There may be a number of owners with different exit horizons, or it may not be possible to optimise the outcome in a single transaction now. This might include for example, the business currently being overly reliant on a significant shareholder with no management succession plan depressing valuation.
Sometimes, maximizing value can be best achieved in two phases with a partial exit now to allow a shareholder to personally de-risk and a complete exit at a later stage when further capital value has been created. Therefore, partial exits may be an attractive alternative to a full disposal either to a trade or institutional purchaser.
Whilst private equity and other institutional investors had historically been nervous about providing funds for entrepreneurs to de-risk questioning their motivations, there has been a significant shift in thinking. There is now strong empirical evidence that management teams that de-risk actually over perform compared to peer businesses typically as a result of being able to take a longer term view rather than protecting short term performance as well as the support provided by an institutional investor. Accordingly, there is strong appetite from private equity investors to provide funds to allow a partial sale of a business (perhaps coupled with investment for growth or acquisition) and they will work with the management team, typically over a 3-5 year period, to grow the value of the business before seeking a full exit for everyone. With private equity typically targeting a return of 3x their investment, the expectation would be that the entrepreneur would receive the same return for the equity they’ve left in the business. Depending on the precise deal structure, it may also be possible to structure a partial exit tax efficiently and benefit for 10% tax under Entrepreneurs Relief.
Our corporate finance team have advised on a significant number of partial exits to institutional shareholders and trade acquirers and would be delighted to discuss your options with you. Contact our team on 01491579740.