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By: Francois Otto and Matthew Jay, Sasfin Corporate Finance

Entrepreneurs who raise money from private equity firms and private investors often leave unrealised money on the table and are not unlocking their full potential.

Controversial statement? Not really.

We regularly deal with businesses that are in a high growth phase where they believe that the only viable alternative is raising equity from private equity firms or private investors. The owners of these businesses view listings as a complicated process only reserved for larger companies.               

Is it always the correct option to list my business?

In several instances, listing may not be the correct approach. In particular, where business owners wish to sell out completely, running a well-designed competitive tender process has the highest probability of extracting maximum value for owners while minimising deal risk. Senior private equity executives tend to prefer bilateral negotiations when buying businesses, but tender sales when needing to dispose of business assets.

However, in many cases, this approach results in the full potential of the business not being unlocked. This mainly applies to those high-growth businesses where capital is being sought for growth, an alternative these businesses must consider is a listing on a licenced stock exchange. 

 

This is especially true where the money raised will be used for business growth either through investing in its operations or, what the market really likes, are earnings accretive acquisitions.

Finding the right buyer(s)

The reality is that when your company is listed you have significantly more buyers effectively acquiring your business than in a one-on-one negotiation with a potential private buyer. By pursuing a listing when you have a high quality business, what you are in fact doing is changing the negotiation dynamics. Now, instead of one party pursuing an investment in your business you have the entire South African investing public potentially looking at your business.

Why this is relevant to the investing community is due to so called “alpha returns” i.e. market-beating returns are more likely to be generated by high growth businesses in the long-run. Most investors understand this concept and are consequently willing to “pay for growth” and will pay a higher price for your business than a private buyer.

This becomes a very important part of creating value for your business. You are getting fair value on raising your growth capital; you will have unwound the liquidity discount inherent in the valuation of unlisted companies (which can be in the high double digits); you would have improved your share’s marketability; and, you now can more easily raise capital (debt and equity). Most importantly, your shares become a form of currency which can be used to fuel acquisitions when your sector is ripe for consolidation.

 

Generally, a listing becomes a viable consideration for companies with a strong market position, that are growing quickly and have after tax earnings in excess of R30 million per annum.

It is critical that business owners understand the listing process. While a business may be thriving, there are many other administrative issues that need to be in place in order to package a successful listing. This is why partnering with the right advisors is crucial early in the process so that they can adequately pave the way for your company’s listing. An advisor’s role in the listing process goes beyond preparing the required documentation. They will coordinate the entire process and provide advice on the method of listing. They should also handle the marketing, size and terms of the listing as well as the timing and costs involved.