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How to unlock equity value and liquidity without selling your business

BDC Growth Equity offers an alternative to traditional buyout and strategic sale scenarios

5-minute read

Entrepreneurs sell their companies for a wide range of reasons, some of which don’t have to do with wanting to completely exit the company.

  • Maybe you are nearing retirement and nobody in the family is interested in taking over the business.
  • Maybe you are looking for partners, but the company’s senior management team doesn’t have the desire, the financial capacity or the risk appetite to purchase part of the business.
  • Or maybe you are facing new challenges and, while you believe you have figured out a way to bring your company to the next level, you do not necessarily want to risk the company’s accumulated net worth and potential equity value.

In any case, if you own a business, chances are a considerable portion of your personal net worth is tied up in the company. And as it stands today, unlocking some of that value is putting you up against some very difficult decisions.

Traditional choices to unlock equity value

The traditional way for entrepreneurs to unlock their accumulated equity value and access liquidity since the late 1980’s has been to:

  • Sell a controlling equity stake (51% and more of the voting stock) to a private equity fund—a “financial buyer” or “buyout scenario.”
  • Sell the full equity ownership to an industry operator—a “strategic buyer” or “strategic sale scenario.”

In both of these scenarios, you will hand over full control of all decisions over the management and future destiny of your company to the buyer and will become an employee in your own business.

While this might be what you are looking for, many entrepreneurs would want, with the proper support and guidance, to keep both hands on the steering wheel to chart the way forward while cashing out a significant portion of their wealth.

Typical structure of a company purchase transaction
Buyout scenario
Source of financing Percentage of financing Equity owned
Bank debt(1) 60% 0%
Private equity fund 30% 75%
Sellers’ roll-over(2) 10% 25%
Total sources 100% 100%
Strategic sale scenario
Industry buyer 100% 100%
Sellers’ roll-over 0% 0%
Total sources 100% 100%

1. Typical bank leverage may vary according to industry and company fundamentals. Usually in the range of 50%-65% debt.

2. The private equity fund will typically ask the seller to retain a small portion of the business post-transaction to align his interest and motivation towards executing a full succession and transition of knowledge, clients, suppliers and key employees.

In both situations, the previous owner is typically asked to sign an employment agreement as well as non-compete and non-solicitation clauses to protect the buyer from the seller’s future desire to start all over again.

BDC Growth Equity offers a third alternative

Well executed, with a carefully chosen investor, a minority investment may well be the right solution to unlock the full potential of your business over the long term.

In that scenario, rather than selling control, you would sell a minority position to an investor, who effectively becomes a long-term partner in the company. Your new business partner not only helps you unlock a portion of your equity value and liquidity, but also brings the same network of external support that a private equity fund brings.

  • A network of professionals helping you recruit executive talent, a nationwide network of private companies that can become new clients or suppliers, external business advisors and industry experts to help build your board of directors or advisory board.
  • Support and guidance in solving future challenges and charting a path to global performance.
  • Deep pockets to support future growth plans, either organic or by acquisition.
  • Patience and resilience in the face of headwinds impacting your firm or industry.
  • A sounding board to prepare and execute on a succession plan to enable your future retirement from the business, knowing a capable team will take over the helm after your departure.
Alternative structure
Minority investor scenario
Source of financing Percentage of financing Equity owned
Bank debt 60% 0%
BDC Growth Equity(3) 10% 25%
Seller’s roll-over equity(4) 30% 75%
Total sources – 100% 100%

3. BDC may invest/purchase 10%-49% of a private Canadian controlled corporation.

4. The balance of the equity BDC has not purchased.

Consider the upside

Imagine that, following your decision to sell equity in your company, the long-awaited multimillion dollar, long-term contract is finally awarded to your firm. The management team supporting you has blossomed and assumed more responsibility, even becoming partial owners themselves. Key customer concentration has been reduced following the acquisition of other clients. And a key supplier that was threatening to leave was diversified away with the signing of three other suppliers. The fundamental risks your firm was facing have been reduced. Its prospects are shining brighter than ever.

In this situation, which of the three financing scenarios above would you rather have agreed to?

Let’s say you had chosen the minority investor scenario. Your business would be worth more today then when you first considered selling it and you would still own the vast majority of its upside. That scenario has enabled you to cash in some of your chips earlier on and diversify your net worth. And today you are ready to transition into a shareholder or chairman role and see your legacy grow with a management team solidly in place.

Which scenario will you choose?

You have worked so hard at building your business, risked all you had at the time. Sweat and blood.

Now standing at a crossroad for the future of your company, which scenario will you choose?

At BDC Growth Equity, we would like to hear your story and maybe convince you, like other Canadian business owners before you, that we can be your equity partner of choice.

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