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Shareholder Motivations for Liquidity

Sep 6 2019

In my previous article that appeared in June’s edition of the Canadian Collaboration Newsletter, I discussed how best to prepare for a liquidity event. Proper preparation ensures a business is well positioned when encountering any unexpected events that may result in a liquidity event. It is recommended to give consideration to various liquidity alternatives in order to yield results that are optimal to shareholders and allow them to best meet their objectives.

Shareholder Motivations for Liquidity

  • Business owners may desire to “take some money off the table” and reduce personal financial risk by diversifying their assets.
  • Business owners may be looking to take a step back from the business in order to pursue other interests or retire.
  • A shareholder can elect to leave the business due to challenging interpersonal situations resulting from mutual ownership with other individuals with different personalities and / or visions for future growth of the business.
  • An unexpected personal circumstance, such a death, deteriorating health or divorce, may require the division of family assets.

Liquidity Alternatives

Numerous liquidity alternatives exist that allow individual shareholders to realize their objectives. These alternatives include:

  • Management /Employee-Led Buyouts:
    • A company is sold to its existing management or employees
  • Recapitalizations and Financial Restructurings:
    • New capital is infused into a company to facilitate growth and the partial buyout of existing shareholders
  • Divestitures:
    • Selling a company to a strategic or financial investor that is external to the business
  • Raising Private Capital:
    • Raising debt and/or equity capital to facilitate growth or ease liquidity constraints

Characteristics of Liquidity Alternatives

The transaction alternatives, as noted above, each have certain characteristics which make it a better option for achieving the shareholder motivations and objectives. Some of these characteristics include:

  • Confidentiality:
    • The ability to maintain a higher degree of confidentiality about the existence of the process and the fact that existing shareholders are looking for a buyer or investor
  • Speed:
    • Certain of the alternatives have the advantage of being able to be executed more rapidly due to familiarity of the buyer / investor with the business and the fact that the required capital for the transaction is readily available.
  • Growth & Upside:
    • Certain of the alternatives allow existing shareholders to continue to retain an interest in the company where they believe considerable future growth and upside potential exists. These alternatives involve partnering with experienced investors with access to tangible resources, experience and knowledge not available to the existing management and shareholders.
  • Price: 
    • By their nature, some of the alternatives will be directed to a broader pool of potential buyers/investors and a more formal auction process will likely be undertaken. Broad auction processes that target strategic investors are typically considered optimal from a price perspective.
  • Use of Proceeds:
    • Certain of the alternatives, by design will result in existing ownership being diluted, taking chips off the table and diversifying their assets. Other alternatives do not necessarily (immediately) allow for these options.
  • Ongoing ownership and management: 
    • Certain of the alternatives result in existing ownership severing the relationship with the company immediately while others result I n continued ownership and possibly management roles going forward. One also needs to contemplate the various alternatives in light of the shareholder’s com with having additional / new stakeholders at the table.

Conclusion

We often times find shareholders desiring a liquidity event fixated on a particular transaction alternative. Given the range of transaction alternatives available, it behooves business owners to carefully consider all the options so that they can identify the alternative objectives available to them.

This is the second article in a series by Nathan Treitel from Segal LLP on transactions and valuation issues relating to small and mid-size privately held companies. This article is from the quarterly Canadian Overview, a newsletter produced by the Canadian member firms of Moore Stephens North America. These articles are meant to pursue our mission of being the best partner in your success by keeping you aware of the latest business news.

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