SMEs or entrepreneurs don’t plan their exits very well.
That’s an experience we’ve met over and over again. One day they decide now is the time to sell and they’d like to leave pretty much as quickly as possible, which causes a problem because they are the main asset, the key asset.
They under-estimate the value they represent within the business and once they walk out of the door the value of the business is impacted just because the key asset has just walked out of the door.
There is a role for equity investors to help with a managed transition to protect the value for the entrepreneur, but also to enable the business to move onto its next stage of development.
At Perwyn we look at this in a three stage process, and the first step of that process Perwyn would become an investor in the business and that allows the entrepreneur to take a fair amount of money, a large amount of his money off the table. It de-risks the situation for him, but it also invests us as a partner with the entrepreneur.
And then there is a phase two in which the transition would happen and the value creation process would start. That really consists of two main elements. The first one is the mind set of the entrepreneur tends to change, once he has taken the majority of his money off the table. While he was previously very much concerned about wealth preservation, now that he’s investing somebody else’s money he’s much more focused around value creation and particularly by being a shareholder in the business he will participate in the ongoing value creation. That change in mind set starts to drive the business forward.
At the same time we would seek to introduce independent management into the company which allows the entrepreneur to step out of the day to day operations. He can focus much more on the broader and larger strategic picture and we have an independent management team that cannot only implement that strategic plan, but stay with the business beyond the next change of control period. So the discount that a company would attract if the entrepreneur is still very much running the business, you would get away with, because the business would then be run by an independent management team that stays with the business.
The third part would be the ultimate sale of the business where both the entrepreneur and the investor would sell their combined investment in the business. For the entrepreneur it triggers a second liquidity event after the liquidity event is already obtained at the very beginning of the process.
We believe that this three stage process maximises value for the entrepreneur. It creates an environment where the business continues to develop. It receives ongoing investment and development. New management is being brought into the business, but it’s also attractive for the entrepreneur because a sale of the business with a swift exit is quite a radical change to the lifestyle of the individual. While this managed transition allows him to reduce his involvement from a full day to day involvement to one where he’s involved on the Board dealing with strategic matters, to ultimately an exit, over a managed period of time.