There is little doubt that growth via acquisition is a sound strategy for an ambitious small or medium business to adopt. The speed of growth is almost always considerably faster than organic growth relying on marketing and sales strategies that are also often limited by capacity issues.
Conversely some of the best businesses are just not quite ready for sale, for a variety of reasons. For example, the owners are too young and not ready for retirement or their layers of management are not yet in place or mature enough. So how can an ambitious acquirer, who identifies a good prospect, find a way to secure a deal where it may otherwise not be obvious?
The answer may lie in what’s sometimes termed an “elevator deal”. The concept mirrors an elevator, that starts at the ground then stops part way up the building, often in several stops before it reaches the top - the top being all the shares in the target company.
By acquiring some rather than all of the shares, sometimes in several steps, there can be significant advantages for all parties to the deal. Let’s look at this more closely.
For a buyer there may be significant benefits to the deal such as access to knowledge, IP, production capacity, skill sets and so on that would otherwise take significant capital and time (as well as associated risk) that can be leapfrogged by acquiring the business. However, it may be that the seller is seeking an unrealistic price (perhaps because the business isn’t really mature enough to generate a life-changing amount for the seller) but the business could be worth more by the merging of the two parties. By agreeing a partial sale, those shared goals can become a reality more easily whilst limiting risk. After all, the seller has to be honest and not hide any issues that might otherwise prove a problem in a standard full acquisition.
For a seller, the advantages are obvious. They can continue to work in the business they know and love but with a renewed sense of purpose and direction, and having derisked their own wealth: they can take cash out in a very tax efficient manner, and use the funds to help create a perfect home or pay for school or university fees or just create a nest egg for reassurance. Crucially, if such a deal is a true win-win, the seller should be teaming up with strategically important partners who can take the business to the next level.
When it comes to a lender, they will see significant comfort in such a deal; a clear commitment from the vendor to leave equity in the business, a reduction in funds committed to the deal combined with incoming management with a plan to grow the business. These are all components that will endear a lender to a deal such as this.
In a previous blog we described how the mainstream banks’ withdrawal from funding the SME market created space for dynamic, flexible and fast-moving lenders funded by professional, institutional investors that offer debt to SMEs across many sectors and stages of development. Those lenders will also support the entrepreneurial intent that lies behind an elevator deal. As we explained, these alternative lenders look for well-managed, profitable businesses in which to invest. An elevator deal, if properly thought through and with a clear rationale, can represent a strong, de-risked lending proposition.
Altimapa was founded to help clients - borrowers and lenders alike - find solutions to unlock opportunities for growth and expansion so understanding how to identify and use creative deal structures and solutions for buyers and sellers of small and medium sized businesses to succeed in unlocking value is a key part of what we do. Get in touch if you’d like to explore this subject further.