As a business owner, there inevitably comes a time when you’ll want to consider “what’s next?”.
Founders usually want to seek an investment option that allows them to enjoy the proceeds of a life-changing financial return for their hard work and ensure their businesses will continue to thrive even when they’re no longer at the helm.
So, understanding all the investment options – and their pros and cons – is essential.
What business investment options are there?
Strategic/trade sale A Trade sale to a larger industry player can be a convenient option, but it often comes at the cost of the business’ brand and culture. In many cases, they involve assimilating the business with former competitors and taking on their name but not all the people, meaning that a business can become unrecognisable in no time.
This makes them a weak choice for founders who care about protecting their life’s work and safeguarding the futures of their employees and customers.
Management buy-out (MBO) The valuation for an MBO can be hard to define and then to reach, and they often prove impossible to arrange. Salaries, financial performance, and market position all count. The value may amount to millions of Euros, and it can be very hard for management teams to raise these sorts of sums, particularly without landing the company with substantial debt. The many uncertainties around MBOs often don’t make them the best strategic option.
Private equity looks for fast growth and a quick exit – often 3-4x growth, and an exit in 3-4 years. That can only work in certain conditions. PE is generally interested in larger-scale businesses with a sizeable addressable market that can be met through debt-fuelled growth. Research has found around 20% of leveraged buyouts backed by private equity firms go bust within 10 years.
Venture capital is focused on high-growth, earlier-stage companies with large addressable markets and significant opportunities for growth and returns. Funds usually go to the hottest start-ups tipped to become the next market leaders. Their expectation is hyperscale growth – and a swift exit.
Permanent equity is designed to plug the investment gap for niche software businesses which traditional investment options – like those above – do not serve well. It is about achieving a strong return and maximum growth for the business over the long term. It particularly suits smaller software businesses in niche markets with a loyal customer base, offering great deals for great companies. Unlike Private equity and Venture capital, Permanent equity has no investment horizon.
Succession planning: Family succession is an option for those wanting to keep the business close to home. But it could spell disaster if the next in line isn’t quite ready or the right fit for leadership. Indeed, research shows 70% of businesses fail when the reins pass to the second generation.
Winding down: Closing the company may be a regretful last resort. After all those years building it up, it can be disappointing to see the company fold and competitors reap your hard-earned customers.
Which investment option is right for me?
For niche software businesses, most of these options present challenges – either they don’t provide the right level of return or spell the end of your company as you know it.
For founders who want to prioritise long-term growth and stability, Permanent equity offers a unique investment option.
By focusing on sustainable growth without the pressure of a quick exit, Permanent equity can help you protect your legacy while ensuring your business continues to thrive.
At Upliift, we’re committed to helping you explore the best path forward, aligning with your vision and values for the future.
Talk to us about why Permanent equity might be your best business investment option. Contact us or email [email protected]
