If you are considering selling your Aviation or travel business, in whole or in part, you should understand that there are different types of buyers. This article concentrates on two such buyers, namely Private Equity Group buyers (PEGs) and strategic buyers (Strategic). Every aspect of your deal will be affected by the type of buyer select including the way you present your company, the negotiating process, price, tax and legal implications, and perhaps most importantly, the future prospects for your company. Understanding these variations ahead of time will undoubtedly help you make the right choices for yourself, your employees and your company.
As reflected herein, selling to a PEG is inherently unlike selling to a Strategic. Sellers need to understand the distinct characteristics of these two types of acquirers before making a decision.
Different Perspectives on Your Company: If you believe that a PEG (and not a Strategic) should be part of your exit strategy, it is crucial that you understand the ways in which PEGs view and analyze companies. These differences will affect every aspect of your deal, including how your company is presented to buyers, how you run the sale process, due diligence, negotiations and tax considerations. A few of the differences we have observed are:
Getting Your Company Ready For Sale: When positioning your business for sale, different buyer types require different positioning strategies. The thrust of your materials, conversations and presentations should be very different. Strategics will be interested largely in how your company will fit into theirs. Can your products be sold to their customers? Do you have technology or other intellectual property that can build their business? Are you active in markets that they’d like to enter? Generally speaking, they place less importance on factors like the strength of a company’s IT infrastructure or the prospect of losing some of the current management in the transaction - they already have senior executives and infrastructure in place. Private equity firms, by contrast, will be looking at your company as an investment in a stand-alone entity that must be able to grow and create value on its own accord. These investors will be looking closely at the strength of the management team, your overall business strategy and plans for future growth. They’ll want to know: how do you plan to increase sales and revenues? What new products or services are in the works? Is geographic expansion a possibility?
Industry Knowledge: In general, Strategics have a keen understanding of the aviation industry trends and dynamics. Industry knowledge varies considerably among PEGs, and a lack of industry knowledge can result in PEGs reaching incorrect conclusions on your business or industry. Given this, you will need to provide much more detail around key market trends and drivers. Also be prepared for a much more thorough (and often time-consuming) due diligence when moving forward with a PEG. Expect PEGs to hire consulting firms during due diligence to help build a comprehensive view of the industry and how your company fits within it. However, although time consuming, the vast majority of sellers find great value in this process, gaining new insights into the industry, as well as identifying new areas for growth.
Vision and Growth: Strategics often have a highly developed sense of where they are going. Again, this means that they are looking to fully understand how your company fits into their growth strategy. When presenting your company to a PEG, the thrust of the conversation is around your management’s vision of the future – how the company fits into broader industry trends, how its business model will evolve and scale, details on sales and marketing tactics, and how the company will deal with a major downturn in the industry or economy. PEGs often want to understand the your M&A capabilities, the pipeline of potential M&A targets already identified, and management’s view of the right profiles of M&A targets.
Return on Investment: Strategics often value a business on both financial and strategic metrics. PEGs, by contrast, base their valuations on the likelihood that a company will be larger, more profitable and therefore more valuable at the time of exit. A PEG will have a target Internal Rate of Return (IRR) of 25% to 35% over their four to seven year investment horizon. Based on this required return, they can determine exactly how much revenue and earnings growth is required to meet their targets. Consequently, before talking with a PEG, you should consider creating a financial model that compares IRR results in several growth scenarios to better understand how investors will view your business.
Exit Strategy: While Strategics plan to own an acquired business indefinitely, PEGs generally have an investment time horizon of four to seven years. This means that PEGs are particularly sensitive to cyclicality in a business. Strategics are more comfortable with any inherent cyclicality.
Choosing the Right Buyer For You: The decision whether to sell to a PEG or a Strategic will affect not just how you present your company, but the proceeds you receive from its sale. Every transaction is different, and you should be working with a team of experienced and qualified advisors including a tax and accounting advisor, a legal advisor, an evaluation advisor, and an estate planning advisor before you enter into detailed sale discussions with anyone. Here are some important variables to keep in mind when comparing private equity to strategic acquirers.
Control and Governance: One key benefit to using private equity as your exit vehicle is that you can realize partial liquidity while maintaining some level of control over your company post-acquisition. Control and governance approaches vary widely between PEGs so it is important to dig into these details. Another major benefit is that PEGs typically allow the business to continue running normally, with the same employees, the same facilities, and the same culture; whereas strategic acquisitions often immediately implement cost cutting and integration programs with the new owner. Business owners who are concerned about job security for their employees, maintaining their name on the business, or otherwise preserving their legacy, often find that selling to a PEG mitigates these concerns. If you choose the private equity route, be prepared for an expanded board. In a majority transaction, the investor will usually install a sufficient number of new directors to give the PEG a controlling vote on the board. In minority transactions, the company’s management team may get to keep a majority of board seats. Board meetings often become more formal and are held on a more regular basis than they might be in a typical middle market business. The board may form committees to oversee key functions like compensation, audit and acquisitions. The new board will often upgrade financial reporting requirements and systems. Expect to deliver monthly, quarterly and annual reporting on key variables including: trends in profitability, revenue mix, revenue by product line, and multiple P&Ls across different businesses. While you and your team remain in charge of day-to-day operating decisions, your board and PEG will have input (to varying degrees) on broader strategic questions including product line and geographic expansion, key management hires, acquisitions and other financing events.
Valuation and Net Proceeds: Of course, one very important factor is economics. Strategics can typically afford to pay more because they will benefit from synergies between their organization and an acquired company. Additionally, Strategics will often buy your entire company outright, in a single transaction. PEGs, by contrast, typically buy only a part of the company. As a result, your immediate proceeds will typically be smaller in a private equity deal than a strategic one.
Management’s Role Post Acquisition: Another factor to consider is your ongoing employment commitment. Management teams may wish to exit their businesses, either to retire or do something else. A Strategic will generally provide that option – usually with some type of transition period in place (from 6 months to 2 years is a typical range). Typically, a PEG will not only want management to stay, they often want to see an equity investment by the management team as part of the transaction.
Risk and Leverage: In a typical sale to a Strategic, you tend to leave yourself with little or no execution or industry risk going forward (unless you agree to an earn-out as part of your deal). In a private equity deal, however, you continue to hold execution and industry risk with additional risks associated with shared governance and control.
Another risk consideration is debt. In most cases, companies that take on private equity will reconfigure their capital structure, adding leverage to their balance sheets. That is one of the major differences between selling to a PEG and a Strategic. From a capital structure perspective, PEGs can enable entrepreneurs to prudently use leverage to minimize dilution and increase their long-term equity value. However, it is also understood that leverage - and the regular payments of principal and interest that debt entails - can be a double-edged sword. If there is too much leverage, some entrepreneurs may not be comfortable in a leveraged environment. The leverage may cause them to take actions like cutting costs and running the business differently. With a PEG, you get to continue to run your business independently, but because of the leverage, you may be constrained in what you can and can’t do.
Structure and Tax Implications: Every transaction tends to have its own unique structure and tax challenges, regardless of the buyer. That being said, private equity transactions tend to be more complex, involving “blocker corporations,” multiple tiers of stocks (including preferred stocks with significant dividends and potential liquidation preferences), and complicated post-acquisition governance issues. The additional layer of debt often used to fund the transaction adds another layer of complexity to the due diligence process, the drafting of legal documents, and the approval process.
What is the right transaction for you?
The above information is not meant to be an exhaustive analysis of the pros and cons or differences between a PEG and Strategic. However, the above is meant to provide you with a solid starting point for the considerations involved and identify the right type of buyer for you. To ensure that you place yourself in a position to sell your company on the best possible terms, you need to carefully explore all options and all types of buyers. In doing so, you will create a competitive process that will lead to the right transaction for you by creating a more complete view of your options regarding structure, governance, valuation, risk and future up-side.
Please call Norman Bluth of McBreen & Kopko if you are contemplating the sale or purchase of an aviation or travel related company, including:
Aviation:
* Ground Handling Companies
* Cargo Handling Companies
* Aviation Fueling Companies
* Fixed Based Operators
* MROs
* Warehousing Companies
Travel:
- On-line Travel Agencies
- Tour Operators
- Consolidators