Why Partner With Us
Selling Your Business: What Are Your Options?
(1)
Your company. It is the thing that has surely made you feel very proud and satisfied, but it has also probably caused you a lot of stress and frustration. It's possible that you started your business from scratch, putting in endless hours and restless nights to build it from the ground up. Or perhaps your parents or grandparents passed it on to you; it's your family's greatest legacy and their mark on the world. In any event, your business is probably one of the most valuable things in your life, tucked away somewhere between your spouse, kids, and that expensive sports car in the garage (maybe not in that order).
The idea of selling a business can be extremely intimidating because of how much value its owners place on it. A business owner may not even know where to begin when they decide it's time to sell their company, let alone what their options are. Most business owners have probably at least considered who might be interested in purchasing their company. A close competitor or major customer may come to mind as the obvious answer (often called strategic buyers). Many owners have probably also been exposed to private equity (financial) buyers, perhaps through an unexpected phone call asking if they would be interested in selling the business.
Strategic vs. Financial Buyers vs. Lifted Falls Capital
-
Historically able to reach higher valuations
-
Valuation based on synergies and business overlap
-
May better understand a particular business' intangible assets
Strategic Buyers
Pros
Cons
-
Any acquisition is likely to be consolidated into existing operations
-
Less M&A experience; slow-moving
-
Usually no reinvestment opportunities
-
Ability to transact efficiently
-
Typically keep management, employees, and facilities in place
-
Capable of competing closely with strategic buyers on valuation
-
Invest in growing the business following an acquisition
-
Often allow seller to reinvest in new entity, and offer management ownership options
Financial Buyers
Pros
Cons
-
Traditionally, private equity has been mathematically driven, so value is determined more by financial performance than synergies
-
May add more leverage than a company is used to handling
-
May be less experienced with a particular industry; need to be educated on intangible
value
-
Able to reach higher valuations by applying synergies through the addition of our other portfolio companies
-
Ability to transact quickly and efficiently
-
Investing for the company's future
-
Allows company ownership to rollover a portion of their equity to continue creating equity value through the bigger entity
Lifted Falls Capital
Pros
Cons
-
N/A
The majority of people categorize prospective buyers into two groups when considering business acquisitions: strategic and financial buyers. A strategic purchaser is an operating company that looks to acquire a target in order to integrate the target's operations into its own in order to expand or enhance its current business. Strategic buyers may be suppliers, customers, rivals, or a comparatively unrelated company trying to break into a new market. In any event, a strategic buyer frequently thinks that obtaining the target will add value beyond the sum of its parts. A strategic buyer bases their assessment of an acquisition on this value, which is frequently referred to as synergy. Synergies can come in the form of cost savings, new customers, cross-selling opportunities, greater diversification, new products, and much more.
Strategic buyers tend to transact more slowly than financial buyers because they are also managing a business and devote less time to the M&A process. Furthermore, a strategic sale might not be the best course of action for a business owner who is especially concerned with maintaining current facilities, staff, or their company's identity because the typical strategic acquisition will be integrated directly into the parent company's operations.
Financial buyers purchase businesses mainly to earn a return on their money, whereas strategic buyers buy to expand and create synergies in their current business. Private equity funds, holding companies, family offices, and wealthy individual investors are examples of financial buyers. Financial buyers have historically been motivated by mathematics, with assessments largely based on the company's financial performance and the buyer's ability to use debt to optimize returns (leverage). However, as the private equity market develops, additional elements have started to become more significant in financial buyer assessments. Due to their increased sophistication within target industries, financial buyers are now better able to comprehend the intangible value that some sectors provide. Furthermore, in their assessment of acquisitions, financial buyers have increasingly enlisted the help of knowledgeable operating partners and seasoned business executives, thereby increasing their capacity to surpass the valuations permitted by financial engineering alone. If merger and acquisition market conditions are favorable, these factors, in addition to the constantly rising demand for high-quality companies, have made it possible for financial buyers to meet or surpass strategic buyer valuations in a competitive sale process.
When selecting the right buyer for their company, a business owner may take into account a number of other factors besides valuation. Among these is the company's future management and staff, the company's history, the owner's and/or their family's need for continuous work, and the wish to stay involved in the business's continued success after it closes. When it comes time to think about selling the company, a private equity buyer might be the most sensible option for an entrepreneur who is worried about any or all of these aspects.
Lifted Falls Capital combines the best of both strategic buyers and financial buyers. We employ the tactics of strategic buyers by expanding the platform company through bolt-on acquisitions, thus enhancing the overall entity by cross-selling, margin expansion and cash flow improvement through economies of scale, and diversifying the customer and supplier base. We also employ tactics of financial buyers by discovering intrinsic value through quantitative and qualitative analysis, utilizing leverage safely to ensure the company can service the debt, and keeping the target company's employees and legacy intact. We value the relationships your business has created over its lifespan, and we believe these are vital to its continued success.
Full Buyout vs. Rolling Equity
Lifted Falls Capital invests in businesses through obtaining a majority equity position in the company. This can come in two ways: 1) completely buying out the seller's equity position or 2) buying a majority of the seller's equity position and having the seller roll their remaining share post-acquisition. Both instances provide liquidity to the seller, albeit the former provides more liquidity than the latter. However, rolling equity post-acquisition provides an additional route of increasing equity value by growing with us and deferring taxes that would have been paid on the complete sale. Sellers rolling some of their equity provides us with an additional layer of confidence because we will be more convinced of the deal succeeding, as the existing owner is willing to put faith in the future performance of their company. This partnership may take the form of an ongoing management role, board seat, or consulting. Sellers rolling equity post-acquisition is also referred to as a "second bite of the apple."
By partnering with us, sellers will benefit from advantages associated with a private equity-owned business, such as accelerated growth, greater access to capital, and the possibility of future add-on
acquisitions. All of these factors taken together can position a seller with rolled equity very favorably when it comes time to ultimately exit the investment. Even with minority ownership (typically, reinvested seller ownership ranges from 10-30%), it is not uncommon for sellers with rolled equity to receive proceeds from this second transaction that meet or exceed those received from the initial sale of their business.
Lifted Falls Capital Ownership: Accelerated Growth and Reduced Risk
Even after learning about some of the long-term advantages of partnering with us as discussed above, a business owner may be thinking, “If I am looking for a financial reward for my business’s growth, why would I sell a majority of my ownership to Lifted Falls Capital? Wouldn’t my payoff for growth always be higher if I owned more of the business?” In many cases, this is a very valid thought. Even with the increased return associated with a leveraged structure, an owner of a rapidly growing business would be correct in thinking that, as long as growth continues, their return would likely be higher if they retain full ownership and sell further down the road. The trouble with this assessment occurs when growth slows, halts, or reverses.
As all entrepreneurs likely know, the risk-reward proposition of owning a business can be quite high. If the business does well, the payoff can be considerable, but so too can the downside if the company faces hard times. One of the most attractive aspects of a sale to private equity is that it can allow a business owner to lessen their exposure to this risk, while still enabling them to capture upside if the business performs well. It also means that a business owner would no longer be required to personally guarantee any company debt, which greatly reduces their potential downside exposure. A sale to Lifted Falls Capital allows an owner to diversify their wealth and reduce risk, without requiring them to completely step away from the business they worked hard to build.
In addition to reducing risk, partnering with us accelerates a company’s growth. Lifted Falls Capital gives the company access to capital that can be used for capital expenditures, key personnel hires, and even add-on acquisitions, all of which can translate directly to increased growth. Furthermore, Lifted Falls Capital's professionals are experienced and well-connected, and can provide less-tangible assistance such as board-level guidance, introductions to potential customers, and improved supplier pricing. All of these advantages help to drive growth that may have been unachievable without our help.
There are certainly many situations where a business owner will conclude that it is not the right time to sell ownership in their company. However, in certain circumstances, such as when an owner would like to reduce their risk exposure or when they feel that they have taken the business as far as they can on their own, a sale to Lifted Falls Capital can offer a very compelling win-win solution.
Example of a Sale to Lifted Falls Capital as a Wealth Creation Event
Ann Tropanure is a business owner. Several years ago, she took over her family’s small manufacturing business, which was started by her father. Mr. Tropanure poured his heart and soul into the company, taking it from nothing to around $2 million in revenue. When Ann took over the business, it became her priority to ensure that it continued to grow and flourish. And flourish it did; under Ann’s leadership, the small company grew from $2 million in sales to $10 million. At this point, Ann realized that the business she owned today was very different from the one she took over from her father. She was facing new situations and challenges, and continued growth was becoming not only more difficult, but more expensive. Ann realized that, while she was very good at growing a small business into a larger one, she was not as well-equipped to take her company to the next level on her own.
Ann decided that she needed a partner who could provide both the expertise and capital needed to continue the business’s strong growth. While Ann was certain that a financial partner was needed for the business to continue to succeed, she was torn on another issue. Ann wanted to capitalize on her hard work and take some money out of the business, but also felt that the company had untapped potential, so therefore did not want to sell 100% of her ownership. Ann needed a financial partner that shared her vision for the business, could provide capital for growth and strategic guidance.
Transaction Structure
Debt
Equity
$4M
(40%)
$6M
(60%)
Following the transaction, Ann stayed on to continue to run the business, but was able to step into more of the strategic guidance and relationship management role on which she had always preferred to focus. Over the course of the next five years, the business continued to grow. Throughout this time, LFC invested a considerable amount of additional capital into the company. These investments included upgraded equipment and improved IT systems to increase quality and efficiency, key personnel additions to the company’s salesforce and management team, and even the acquisition of a smaller competitor. These, combined with the leadership of Ann and her expanded management team, allowed the company to double in revenue and expand its margin by 5%. When LFC decided it was time to exit the investment, the business was generating revenue and EBITDA of $20 million and $2 million, respectively. The company had also used its cash flows to completely pay down the debt from the initial transaction. LFC and Ann's work to grow the business in size and create operational efficiencies allowed the company to expand its valuation multiple, creating an additional means of value creation.
Purchase Price
$30M
Transaction Structure
Debt
Equity
$0
$30M
(paid down by the business's cash flow)
Equity Payout
LFC
Ann's Reinvestment
$3.2M
(80%)
$0.8M
(20%)
The company’s strong revenue growth, margin expansion, and leveraged structure, combined to make for a very attractive exit for both LFC and Ann. Ann’s 20% ownership stake in the new company, which she initially invested $0.8 million of her original proceeds to receive, was now worth $6 million, representing a multiple on invested capital (MOIC) of 7.5x.
Partnering with LFC enabled Ann to grow her business well beyond where she could have taken it alone, as well as reduce her risk profile, all while continuing to create significant wealth within the business she and her family worked hard to build.
Source(s)
(1) TKO Miller: Second Bite of the Apple
Purchase Price
$10M
Equity Investment
LFC
Ann's Reinvestment
$3.2M
(80%)
$0.8M
(20%)
Transaction Structure
Debt
Equity
$0
(paid down by the business's cash flow)
$30M
Equity Payout
LFC
Ann's Reinvestment
$24M
7.5x
$6M
7.5x
Purchase Price
$30M
$10M in revenue
$2M in revenue
$2 million in revenue
