This article is taken from our quarterly overview of Canadian news, a newsletter published by the Canadian member firms of Moore Stephens North America. These articles are part of our mission to become the partner of choice for your success by keeping you up to date.
In my previous article, published in the June issue of the Canadian Collaboration Newsletter, I explained how to prepare for a liquidity event. A well-prepared company is in a position to deal with any unexpected situation that could lead to a liquidity event. In order to achieve optimal results for shareholders, and to enable them to meet their objectives, various strategic liquidity solutions need to be considered.
Shareholder motivation for liquidity
- Business owners may want to “get their marbles out” and reduce the financial risk they take personally by diversifying their assets.
- They may also wish to take a step back from the company to devote themselves to other activities, or to retire.
- A shareholder may decide to leave the company because of interpersonal difficulties linked to involvement with other people with a different personality or a divergent vision of the company’s future growth.
- Unexpected personal circumstances, such as death, health problems or divorce, may require the division of family assets.
Strategic liquidity solutions
There are a number of strategic liquidity solutions that enable each shareholder to achieve his or her objectives. These strategic solutions include :
- Management or employee buyouts:
the company is sold to its existing management or employees. - Capital and financial restructuring :
new capital is invested in the company to promote growth and the partial buyout of existing shareholders. - Divestment :
the company is sold to an external financial or strategic investor. - Mobilizing private capital:
debt or equity are raised to promote growth or alleviate liquidity shortages.
Features of strategic liquidity solutions
As mentioned above, each strategic transaction has its own unique characteristics, making it the perfect solution for meeting shareholders’ motivations and objectives. Some of these features include:
- Confidentiality:
The ability to maintain a high level of confidentiality about the existence of the process and the fact that current shareholders are looking for a buyer or investor. - Speed:
Some of these solutions have the advantage of being able to be implemented without delay, because the buyer or investor knows the company and the capital required for the transaction is readily available. - Growth and development:
Some of the solutions enable existing shareholders to retain a stake in the company they believe has great growth potential. These solutions involve partnering with investors who know how to access concrete resources, and who also have the experience and knowledge that managers and shareholders don’t have. - Price:
By their very nature, some of these solutions will be aimed at a wider pool of potential buyers or investors, and will probably trigger a more formal process of sale to the highest bidder. Global bidding processes targeting strategic investors are generally considered to be price-optimized solutions. - Product use :
By design, some solutions will result in dilution of existing shareholdings, withdrawal of invested sums and diversification of assets. Other solutions will not necessarily (immediately) provide for these possibilities. - Maintaining participation and management :
Some solutions require the immediate severance of relations between existing shareholders and the company, while others ensure the maintenance of shareholdings and possibly the safeguarding of management positions. In addition, the various solutions considered must take into account shareholders’ comfort level with the idea of having additional or new players at the table.
Conclusion
Often, we have seen shareholders who wanted to see a liquidity event resolved by a particular type of transaction. Given the variety of possible solutions, it’s up to the company’s owners to carefully examine all options to determine what other objectives can be achieved.
This is the second in a series of articles by Nathan Treitel of Segal LLP on transactions and valuation issues relating to small and medium-sized private companies. This text was written as part of our quarterly overview of Canadian news, a newsletter published by the Canadian member firms of Moore Stephens, North America.
