Entrepreneurs are increasingly choosing to sell their businesses at a younger age. For the selling entrepreneur, the business transfer heralds a new phase in his or her life.
The sale proceeds are nice, but so are "useful work," "job satisfaction," and "being engaged meaningfully. There are several ways to put sales revenue to meaningful use. But how do you do that and what are possible areas of focus when investing after a business transfer?
What the entrepreneur wants to accomplish with his or her assets is often a personal issue. The relevance of meaningful investment opportunities has increased in part because of negative interest rates on savings.
Here are some examples of such investment opportunities. The emphasis in this type of investment is on an active role of the selling entrepreneur, which goes beyond securing capital. Entrepreneurs were and are busy bees and the time to do nothing has not yet arrived for many of them.
#1 Vendor loan
Still in the acquisition process, you as the seller will need to consider what portion of the sale proceeds you may want to keep at risk. Increasingly, in addition to bank financing, business acquisitions are being financed through a vendor loan. A vendor loan is a (subordinated) loan provided by the seller to the buyer as part of the financing of the acquisition.
Vendors can often make a realistic assessment of their risk, and as a result of the higher risk profile, they can negotiate an attractive interest rate. Providing a vendor loan shows confidence in buyer, which makes a bank more likely to step in and provide capital on more favorable terms to realize the desired acquisition. A vendor loan is a form of deferred payment of the purchase price. The use of this instrument will often bring seller involvement and is part of a longer transfer period.
One disadvantage of a vendor loan is that it is a deferred form of payment and is often subordinated to the providers of debt capital (banks). Specifically, this means that a repayment on this financing may only take place after the debt provider gives permission. The test is whether after a possible repayment the covenants of the bank financing are still met.
When providing a vendor loan as a seller, it is wise to include agreements in the sales agreement about the amount of any buyer's management fee and dividend prohibition to mitigate the risks of default, failure to repay the loan.
#2 Informal investor
Partly due to a lower willingness to finance from banks in the SME market, there are opportunities for wealthy former entrepreneurs, also known as informal investors. Informals participate in businesses by taking a (minority) equity stake or providing a subordinated loan. Or even a combination of both.
This group of investors focuses particularly on companies in the (pre-)start-up and growth phase. As an informal investor, you have more to offer than just capital. As a former entrepreneur, you have accumulated a lot of knowledge and experience which can be very valuable for start-up/growth companies. Your expertise is at least as important as the amount you are willing to invest. There are several platforms where informal investors can connect with starting and growing businesses.
#3 Connecting with private equity firm
A private equity firm, also called an investment fund, invests venture capital from (institutional) investors in promising, unlisted companies. Mostly in SMEs. However, in addition to capital, the private equity firm also offers access to knowledge, experience and network.
There are several initiatives in this market that you as a former entrepreneur can connect with. You can do so in an active role, serving on supervisors, or the investment committee. An investment committee evaluates new investment propositions. Whereas you as an informal investor are on your own, a private equity firm has specialist knowledge and a large network of former entrepreneurs in various disciplines. Because of the many businesses in its portfolio, the diversification possibilities of a private equity firm are greater than the informal investor. This benefits the desired risk diversification.
In addition to attractive returns, you can share your knowledge and experience with promising portfolio companies. You are also able to expand your network and have the opportunity to work with other former entrepreneurs. Value creation is the common thread here.
