Written by Stuart Andrews, Managing Director, finnCap Limited
When considering exiting a business, the owners of growth companies have historically been presented with two options: to go public or to sell to a private buyer, be that trade or private equity.
Both routes have their pros and cons of course, and it is very clear that more businesses get sold than IPO – particularly recently. Whilst it is easy to list the pros and cons, perhaps one of the biggest issues is that the IPO route is becoming increasingly rare in spite of some of its advantages.
One reason for this is that well capitalised private equity buyers are able to offer a large degree of certainty of outcome and have significant resources trained on finding and nurturing relationships with companies over a period of time. The same cannot be said for the dwindling number of City broking firms who provide access to the institutions and market for an IPO and as a consequence a lot of companies never get to consider the route.
In light of this we are keen that business owners, whether private equity or entrepreneurial management consider a Dual-Track. It is an approach that I think all business owners and stakeholders could do with understanding better.
Typically favoured by private equity sponsors and venture capital firms with respect to their portfolio companies, a dual-track method means – as its name would suggest – that rather than choosing one process from the beginning, businesses run both an IPO track and a private M&A sale track side-by-side. This then enables the individual or company to choose which option they deem more appropriate when both processes are well underway.
There are clear advantages to this approach, including mitigation against economic and political instability and a sudden stock market sell-off, or if a private deal comes with unacceptable strings. In these scenarios, having the freedom to switch track may present a superior exit option.
If managed properly, a dual-track process can offer a number of other benefits, not least the potential for a higher valuation. Indeed, IPO’s and M&A can often result in different valuations as each process is affected by different external factors. The public route can be hostage to stock market sentiment, volatility and comparisons with the recent trading performances of peers within the sector. Valuations in an M&A sales track will focus more on realising synergies, industry consolidation and obtaining critical assets such as intellectual property.
As a consequence, via a dual-track the seller has greater protection against fluctuations – not least as if external factors reduce the valuation for one process, the valuation for the other process is likely to be affected less.
However, there are of course a number of considerations that need to be taken before a dual-track approach is taken. There are three in particular I would watch out for.
The first is whether a business leader personally – as well as the business itself – has the necessary capacity and will to undertake the IPO part of the process. The continuation of growth and the management team are critical parts of an IPO and whilst a business can be sold and a new management team injected the same is not true for an IPO
Second, as well as being time-intensive, the dual-track process can be relatively resource-intensive. Specifically, management focus can be divided and there is the potential that neither path will be pursued with the necessary determination. Therefore businesses must make sure they are prepared for the undertaking and, crucially, hire the right advisers.
Third is the advisers themselves. Both the sales process and IPO process are intense with a reasonable level of cross over between the two. Normally there are different advisers for each, which can lead to some conflict around results orientated remuneration and messaging. We therefore believe that it is best to find a single adviser that is skilled in running both processes.
Above all, if I think of all the growth businesses I have seen pursue an exit, the most successful were those who prioritised limiting interference with the day-to-day running of the business, and who coordinated as much as possible work streams such as due diligence
And as I’ve alluded to, the choice of adviser (whilst always being important), is even more critical when it comes to a dual-track approach. At a minimum you obviously need to ensure that your adviser is sophisticated enough to oversee both processes. But, in order to gain the most from the dual-track approach, I would argue that you need an adviser with that important quality – true impartiality when it comes to weighing up the outcomes of floating and selling.
Ultimately, the dual-track method offers an excellent alternative route for business owners to complete their next business step, granting them not just greater flexibility but a strong chance of a higher valuation.
Yes it requires focus and coordination, but as with so many things in life, the harder track can often be the most rewarding.