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Deciding to float or sell? Try Dual Track

This article is adapted from a feature in the Ambition Nation Magazine, which is given out free to delegates at the Ambition Nation Summit, Wednesday 2 October 2019.

Dual Track is a finnCap service offering that gives entrepreneurs more options when it comes to selling a business. At its heart, it combines two processes – preparing a company for sale and an IPO, which are run in tandem. It’s not a new thing, per se, but since finnCap acquired Cavendish Corporate Finance in December 2019, we have the unique ability to offer equity capital markets experts and a market leading sell side team under one roof to give company leaders the ability to explore a wider variety of options to create value.

Dual Track should not be thought of as two separate processes, but rather the best method of getting to the key deliverable for an entrepreneur or business owner, which is the sale of their business, at the best possible price, to an owner that is supportive of the business in the long term.

The IPO and selling processes

The preparation for an IPO or formal sale is much the same in the early stages. On both routes you are looking at prospective buyers – be it potential trade buyers or private equity, or on the capital market side, public market institutions and doing due diligence to understand, value and verify the statements that you’re making.

Are we seeing a trend of entrepreneurs wanting to leave their choice until a later stage? Well, yes and no.

In truth, it depends what that entrepreneur is looking for. Some have reached the stage of running a business for 15 or 20 years and just want to retire. They’re looking to find a trade buyer or private equity firm that wants either 100% or a large majority of their business. On the public market side, it tends to be geared towards companies where entrepreneurs are looking to continue a growth journey and further realise their ambitions.

Dual Track is ideally suited to those who are looking to realise value whilst providing access to further funds to grow the business over a longer period of time that might be accomplished in the public markets, under private equity ownership or as part of a larger company.

At finnCap we can help you consider all options. Our joint teams can help you assess whether the IPO route is possible and how that might be combined with a trade sale or to look at a PE process with a potential IPO to provide some competitive tension in certain scenario. Within the scope of a Dual Track there is plenty of room for preferring one option over another or to create options within another process by having a backstop.

Is there a downside?

Dual Track is not a new concept and there has, historically, been a key downside and that’s that you do need to be careful not to contaminate processes. By running Dual Track, you need to keep in mind that it is something you’re pursuing in order to keep options open but unfortunately news leaks and people can be misinformed, or stories written in an unhelpful way. If you’re seen to be trying to sell the business to trade or PE, but it looks as if – through your PR or corporate comms – your preferred option is in fact to float then that creates conflict and confusion or even worse the suspicion that one of the processes has failed. With finnCap Group keeping the two processes consolidated under one roof it is easier to ensure transparency of information and also to prevent any possible contamination. Importantly we don’t have two teams pulling in different directions with different financial rewards. We are one team trying to get the best result for a client, agnostic as to the best solution.

Decisions, decisions

Which path do you choose? Short answer, it depends. We tend to know quite early on which route someone will take because ultimately the entrepreneur knows what they are trying to achieve.

We know that a lot more businesses get sold than IPO. That’s just a natural function of where people get to in the lifecycle of their business, but it also comes down to the management team.

Conversely, management are not necessarily a driver of whether a business can get sold (ultimately, a buyer can inject new management, but the IPO market won’t). We find that the public markets are ideally suited to growth companies that will continue to require working capital to do things but that businesses in steady-state, low, single-digit growth percentages tend to be more attractive to a straight sale, often as a result of the higher leverage ratios that can be applied in private.

Furthermore, there are pricing differences that are applicable to the more flexible capital structures that can be employed outside of the public markets. This is before public factoring in that this leads to public markets pricing around equity earnings after debt service whilst trade and PE can work on pre financing earnings given the greater control over capital structure. This creates differences between the two, but not always in favour of PE where public markets can often price growth opportunities more highly.

Your choice of whether to IPO or sell depends on your business prospects, where your management team is, and where you are as a business leader, in terms of the lifecycle of your company. What Dual Track does, especially when both teams are operating under one roof, is find that critical next step that maximises value.