Change = Opportunity
Creative Deal Structures Stimulate Market & Benefit All Parties
In our September Newsletter, we discussed the increased interest we’ve seen from investor groups, such as family offices, holding companies and management firms. With economic uncertainty and higher interest rates making it more difficult for first-time buyers to afford to purchase homes, these groups remained bullish. While some are particular about industry or location, many are agnostic and care largely about the current financial performance and projections.
While these investors are very adept at selecting highly performing businesses to invest in, they are not typically interested in managing the day-to-day operations. Sellers who receive offers from these groups face a difficult decision of whether to agree to longer-term management contracts or sell their businesses. Not a great situation to be in, to be sure.
The X Factor
BabyBoomers and Millennials make up the two largest age group generations in the workforce. While many Millennials are now moving into management and ownership roles, the majority do not yet have sufficient career experience for those opportunities. Meanwhile, Boomers are retiring in droves, leaving significant gaps. Not only does this present issues as business owners in this generation retire, it also presents challenges for company’s who are losing long-tenured managers. Here enters the X factor into the equation. Although much smaller in numbers, GenX workers have enough experience to manage and run enterprises. Too old to fill entry level roles and largely too young to consider retirement, they offer that perfect blend of relative youth and career skill and provide an option for investors looking for C-level talent when an existing owner is not willing or able to stay on in that capacity.
Investor groups, enticed by a company’s impressive cash-flow and profitability, but frustrated by a tight labor market, particularly at this level, are now coming up with creative solutions to attract executives for these opportunities.
Such a scenario could look like this:
- Family Office ABC wishes to purchase Company XYZ from a retiring business owner.
- ABC’s hope is to increase revenue through increased efficiencies and emerging technology, resulting in higher net profits. This is a five-year plan as ABC intends to then re-sell XYZ at a higher price
- Not interested in operating the company, ABC is unwilling to incent the current owner to stay on, as they are retiring for personal reasons.
- With cash-flow strong, ABC decides to allocate a percentage of Officer Compensation (current owner’s salary), along with a minority equity stake (attached to a vesting schedule) to Operator #1, a 50-year-old with nearly 20 years of industry experience to assume the role of Director of Operations.
- Operator #1 now has a five-year window to secure their own financing or attract investors to purchase XYZ after year five. Should they choose to not do so, they could remain with a new ownership group, negotiating for higher compensation or take a job elsewhere.
This scenario enables:
- The current owner to retire
- ABC group to purchase a company with skilled management in place, overcoming labor market challenges
- Operator #1 to pursue an eventual pathway to business-ownership or gain impressive career experience
Obviously, this scenario has a few moving parts and cannot necessarily be completed overnight. However, it is also uniquely appealing in that all parties are able to achieve their goals with minimum risk.
Transworld Business Advisors of Maine helps buyers and sellers explore this option when it suits their needs. As a franchise of the world’s largest business brokerage, our team of Merger & Acquisition advisors and an adept team of professional partners (attorneys, CPA’s and financial advisors) can provide solutions to Buyers, Sellers and those seeking C-level career opportunities.
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