Business owners balance a number of capital needs that can vary by industry, company life cycle stage, and plans for strategic growth. When a business has limited operating liquidity, there may be a lack of resources available for creating the kind of growth a business owner desires to achieve. With all of an owner’s equity tied up in the business, reinvestment options might seem too risky. Fortunately, there are other strategies available for business owners seeking additional capital to grow their business.
“There are other strategies available for owners who need investment capital.”
Divesting an unsuccessful division
If one line of a particular business is more profitable than another, the business owner and his or her management team should consider divesting the less profitable division and using the profits from this sale to re-invest in a more successful asset.
In this scenario, management and shareholders should focus on assessing the value and strategic alignment of the asset in question. Is this particular line of business vital to the long-term plans for growth? Is the division worth more on the company’s balance sheet than it would be anywhere else? If the answers to both questions are a resounding “no,” a divestiture should be further explored.
Partial sale to private equity
A private equity recapitalization can provide a business owner with additional capital for growth while allowing the owner to remain in control of the business and positioning it for a future sale at a higher price. Numerous private equity groups specialize in partnering with companies looking for an influx of funds for future growth. These firms tend to focus on helping lower- to middle-market companies enhance operations by growing revenue and profits.
Typically, the business owner will sell a majority of the company to the equity group while retaining a minority share. The firm will leave the original ownership in place. Their involvement with the operational aspects of the target company depends on the objectives of the fund. Many funds have significant experience in the industry in which they are investing and will choose to use that experience to guide the company’s strategic growth. Therefore, while the original owner might keep the title of chief executive officer or president, the private equity group will most likely be running the show.
As the existing management team and private equity group will continue to work together following the transaction, selling shareholders need to determine that they are compatible with the fund’s principals. The relationship should be mutually beneficial as the ultimate goal of a private equity group is to strategically grow the business for a sale in the future that will provide a higher return on investment for all of the shareholders.
For those business owners looking for a means to grow their business, a partial sale can increase revenue and can also reduce expenditures on unprofitable aspects of a company. While there are some risks associated with a partial sale, many owners can take advantage of the additional resources this can bring into the company and leverage the investment to grow the business. A partial sale can provide the necessary resources to achieve the shareholder’s goals, whether that be to increase operational stability, launch long-term growth initiatives and strategies, restructure balance sheets or identify and recruit executive hires.