How to assess Strategic Alternatives and minimize risks

Posted January 13, 2017 by Charles S. Lachman

We often find clients scratching their heads about the future…whether to sell their business, make a tactical acquisition of a business or talented industry producer, raise additional capital or take a long vacation. It’s not so easy, nor are the alternatives always obvious.

One way we help our clients address these questions is to identify and lay out all the options and evaluate them against their personal objectives – how much independence they may need in their lives, what level of value they might expect, how much liquidity they require and what level of risk they are willing to entertain. We actually prepare a financial model for each of these alternatives, in addition to assessing the less tangible attributes or deficiencies of each decision point. The alternatives considered are often: an external sale of 100% of the company; a sale to management; a sale to employees (ESOP) or management (MBO); a public offering, if applicable; a sale of a minority stake in the company; and a recapitalization or special dividend.

What comes out of these assessments is usually pretty interesting. An outright, external sale to a third party (which will be different if it’s a strategic party vs. a financial party) usually yields a high value and often a lower degree of risk. However, a recapitalization may provide additional liquidity and flexibility for the longer term. The iterations in between have advantages and disadvantages…and tradeoffs… depending on the perspective of the owner, and where he or she is at this point in life.

The same client may not be ready to sell his/her company, but is also unsure about the tradeoffs of expanding his/her business. We assist in defining the objectives for growth, and then determine what capital might be required to effect that plan. How much financial capacity does the company currently have? What are the financing alternatives that might reasonably and prudently help drive the plan: Senior debt, subordinated debt, additional equity? What are the tradeoffs to raising the capital, in terms of collateral or guarantees? Finally, we need to assess the risk inherent in the decision. These discussions are the purview of a trusted advisor who has the benefit of a fresh perspective on your business and judgment informed by years of experience helping clients realize full value for their businesses.