How can I provide an exit for co-founders with cash and value tied up in the business?

We are a profitable three-year-old, £6.5m turnover, catering business. Two of my founder shareholders, who hold a combined 29% of the company’s shares, want to exercise their right to exit the business. We have been concentrating on growth with any profits ploughed back into the firm and most of the value is tied up in the business. We also have little free cash. What options are available to me?

Nandita Saghalis of Insinger de Beaufort writes:

It would appear to me that there are three options: a buy-out supported by a venture capitalist; a placing of new ordinary shares to raise the firm’s funds in order to buy out your founder shareholders, coupled with admission to the Alternative Investment Market; or a trade sale.

Although you say your business is profitable you haven’t been paying dividends and have instead ploughed any profits back in to the business. You also say that you’ve little free cash. Unless the business is heavily capital intensive, which would be unlikely in catering, the implication is that the profitability of the business isn’t high. This would tend to rule out both options one and two, as the business would need to be producing sufficient profits to provide a venture capitalist with the required return and, likewise, to provide investors on an AIM flotation with a satisfactory dividend yield aligned to strong growth expectations.

In light of this, I think your most practical option would be to consider a trade sale to a company involved in the same sector. One which would be able to identify and realise economies of scale and thus help to increase the profitability of the business. While this option would involve you, as well as the other founder shareholders, disposing of your holding in the company, it should be possible to exchange your stake for new shares in the purchasing company, thus giving you an ongoing interest in the firm.


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