Selling to a strategic buyer

Part of being a business owner in the intel and defense industry is acknowledging that, one day, you will choose to move on to different challenges and priorities. Whether it’s one year from now, or in the distant future, having a strong plan and understanding of the environment/process will help you to determine the terms you must care about.

Preparing for this occasion is called exit planning, and it is an integral part of the advice we provide to  defense contractors at High Stakes Partners. One particularly effective business exit plan that we will discuss here is selling your company to a strategic buyer. A strategic buyer is an existing business that is either in your industry or one closely related to it. It can be a client, a competitor, a vendor – or it can be a company that you have no previous knowledge of whatsoever. The one thing that virtually all strategic buyers have in common is the desire to acquire other companies as way of improving their industry competitiveness.  A strategic buyer will acquire your entire company.  Though there may be earn outs or agreements to stay on, generally your equity will be acquired in full at closing.

Pros to consider

Ability to move on to your next chapter more quickly:

It is typical, though not certain, that founders of companies that sell to a strategic buyer do not fit into the long term leadership plans.  Often this is a mutually beneficial matter.  After a period of assisting with integration, the founders can move on to other ventures, other passions such as family, philanthropy, or even another business.  It’s not uncommon for founders and business owners to become burned out and simply need a departure from the daily strain.  A strategic buyer will facilitate that happening sooner. In contrast, other exit types continue to leverage the founder and a significant leader in the future. In those cases, full departure can be much further down the road.  An exit plan can help you understand what’s important to you.  How long can you stay to help?  What are your thoughts on non-compete agreements?  How do you feel about earn-outs, etc.

Enterprise value is typically higher:

Generally, strategic buyers ascribe a higher value on your equity.  There are several reasons why this is the case.  One of them is that since you are not rolling over any equity, you will have no second “bite at the apple”. That second, or even third bite, can entice an owner to seek bigger rewards down the road, taking a lower price for the initial shares.  That’s not the case with a strategic buyer.  There are other reasons, but generally a strategic buyer will provide the highest up front enterprise value.  Your exit plan should clearly identify how you hope to value your company.  All up front? Or in steps with opportunity to improve.

Your employees and customers often see immediate increased offerings:

For many smaller companies, there are natural boundaries that you just can not offer to your customers and employees.   Those barriers often go away with a larger strategic company dues to scale and diversity.  Customers may find a broader array of capabilities with the ability to scale projects much quicker.  Employees will find more ability to advance careers and partake in a greater diversity of projects.  Often a larger company has a much broader and customizable benefits program.

Cons to consider:

If you’re not looking for “All in” this probably isn’t for you:

As mentioned above this is for people whose exit plan defines selling the entire company and leaving behind being an owner in any sense.  There may be plenty of ability for you to stay on and perform as a significant leader, but it will be as an employee who reports to other parties, not as an executive.  This is often a very challenging paradigm shift for founders of companies that have been in charge for a while.  You lose your power as a major shareholder, and will need to operate as  a leader within the constructs of the new company. Your exit plan should clearly articulate your plans regarding your near- and long-term roles and what strings you can live with.

Integration difficulties :

Strategic integrations can be very consuming.  Even when you start out with the concept “We’re going to leave you alone” it creeps in.  Typically, integration has the goal of removing the redundancies.  These redundancies are almost always on the side the ledger.  Even in the best cases, and with the best intentions, integrations challenge people and lead to significant distractions and attrition.

Loss of identity for your brand and possibly even culture:

Eventually many of these integrations have a goal of removing the branding and identity of the acquired company.  This can be disconcerting to employees, customers, and even you.

Selling to a strategic buyer can present some drawbacks that are worth keeping in mind, as we have highlighted above. It is important to consider the potential loss of current employees, your stake within the company, and identity changes to the company that can occur following a sell to a strategic buyer before you move forward with this exit strategy.

Contact High Stakes Partners Today

Selling to a strategic buyer can be an effective way to leave a business but also one that, nevertheless, requires thoughtful advance planning. As such, consider starting a conversation about developing this type of business exit plan with High Stakes Partners – one of the premier providers of defense contractor consulting services in the country. We are happy to evaluate your business exit plan goals and recommend a different course of action should that be warranted. We could, for example, help you implement a business exit plan that entails creating an employee stock ownership plan (ESOP), selling to a private equity group, or selling a partial stake in your company.