The concept of a "pre-exit" has become increasingly known and popular among SME (family) businesses in recent years.
Private equity approaches the owners of these businesses with a proposal to buy a portion of their shares, allowing these entrepreneurs to already realize some of the value and receive it in the bank.
The idea is that the remaining shares remain in their hands for a few more years and then after, say, 5 years they are sold to third parties at a higher value, because private equity allows for faster growth.
Manager buy-in
At BuyInside, we have a slightly different approach to pre-exits. Instead of private equity, we work with a buy-in manager who buys a large equity stake. This buy-in manager, together with the existing shareholder(s), establishes a company, which then buys all the shares in the business.
Part of the purchase price is financed by the bank, so the selling shareholder already realizes part of the value. An amount equal to the financing raised at the bank plus the funds deposited by the buy-in manager is already received at the bank. In practice, this means that more than half of the current value is already realized.
The advantage of this approach is that the buy-in manager actively joins the company. This may be as managing director or another, often commercial role. He therefore has a deeper involvement in the business as a shareholder and director, and the unique characteristics of the family business are thus better preserved.
After a number of years, all of the shares can be sold to a third party, as in private equity, or to the buy-in manager, who then continues the business.
Continue to grow
This approach offers several advantages. First, the continuity of the business is maintained because the buy-in manager is already familiar with the business and culture of the family business. Second, the buy-in manager can respond more quickly and effectively to changes in the market, in part because he or she has a direct stake in the success of the business. The business can grow into the next phase, which would not have been possible without the knowledge, skills and commitment of the buy-in manager (co-entrepreneur).
In addition, this approach also offers financial advantages. With financing from the bank and input from the buy-in manager, the selling shareholder can already cash in on part of the value of the business, without having to sell all the shares immediately. This offers the opportunity to gradually exit the business while benefiting from the growth the buy-in manager can achieve.
Ensuring continuity
In short, the pre-exit through a management buy-in is an attractive option for SME (family) businesses looking for a way to sell part of their shares. In doing so, they may also (want to) take a step back from the daily operations while ensuring the continuity and growth of the business.
At BuyInside, we have extensive experience arranging these pre-exits and can help businesses find the right buy-in manager and make the process go smoothly.
