Balancing Corporate & Shareholder Objectives
by Gene Bitonti & Joe Wagner
Universal Advisor, 2007 Issue No. 3

In the life cycle of a closely held company, there often comes a time when the personal objectives of the shareholders are at odds with the corporate objectives of the business. Typically, this imbalance occurs due to the shareholders’ desire for liquidity and the business’s need for capital. Finding the right strategy in this situation can be a daunting task.

Fortunately, there’s a continuum of strategic alternatives available — from raising growth capital to an equity sale — that can fulfill the needs of the shareholders while providing the business with the necessary resources to grow. However, selecting the appropriate alternative and executing a successful transaction involve careful planning, a realistic assessment of value, and precise market timing.

Review Your Strategy

In order to determine the alternative that best satisfies the objectives of both the business and the shareholders, a series of assessments must be made.

1. Determine the current market value of the business. This is often an eye-opening exercise that helps to set realistic expectations for what’s achievable.

2. Consider company-specific factors. Evaluate the life-cycle stage of the business, recent and projected financial performance, capitalization requirements, growth opportunities, and end market/customer industry dynamics.

3. Consider shareholder-specific factors. These include projected timing of liquidity needs, desire to remain active in the day-to-day business, and the desire to maintain a percentage of equity ownership. Also, succession/estate planning considerations and tax implications often become critical factors in determining an appropriate strategy.

4. Evaluate current trends in mergers and acquisitions (M&A) and consider the capital markets. Ultimately, the availability of debt and equity capital to enact a transaction will play a significant role in determining if and when the desired strategy can be consummated.

Evaluate Transaction Alternatives

Whether raising capital or creating liquidity is the objective, there are several strategic alternatives available.



If objectives involve a longer time horizon and a desire to maintain ownership, there are opportunities to capture incremental value by pursuing a growth strategy. Under these scenarios, debt or equity capital can be raised to fuel organic growth efforts, fund acquisitions, or both.

If objectives involve a shorter time horizon and a desire to generate liquidity in the near term, alternatives include a debt or equity recapitalization, a leveraged or management buyout, a sale of the business to a strategic buyer, or the transfer of ownership under another method, such as creating an employee stock ownership plan (ESOP).

The specific path chosen is highly dependent on situation-specific criteria. In today’s transaction environment, there are numerous structures available, from traditional acquisitions and sales to hybrid deals flexible enough to accomplish almost any set of objectives.

In Conclusion

Despite recent headlines regarding credit tightening and stock market volatility, the capital accessibility for middle-market businesses remains at historically high levels. While the financing environment has become more challenging for large, highly leveraged buyouts — in particular those requiring capital from the public debt markets — the effect on middle-market transactions has been much less severe. Middle-market business owners are still taking advantage of the current market conditions to raise capital to fund growth or to monetize some of the value created in their businesses to diversify their estates.

Market timing is a critical success factor in any deal. Engaging in a transaction when market conditions are favorable allows for a broader range of strategic alternatives, better terms and pricing, and a deeper pool of potential partners, targets, or acquirers — all of which increase the likelihood of accomplishing goals from both the business and the shareholder perspective.