At the 2024 MAPP (Manufacturers Association for Plastics Processors) Benchmarking and Best Practices Conference, Michael Benson, Managing Director in Stout’s Investment Banking group and co-head of the Plastics & Packaging Group, spoke on strategic alternatives for ownership transition.

He was joined by two other finance professionals:

• Steve Simone, senior vice president, Plastics & Industrials, Stout
• Matt Fish, president, Vital Plastics

One of the most important decisions a business owner will face is how to navigate a major ownership transition. Owners facing this decision may find that their interests have begun to diverge from the interests of the company. By examining strategic alternatives for ownership transition, companies can pursue an option that realigns corporate and shareholder objectives.

Corporate Versus Shareholder Objectives

A company comprises two entities that must address conflicting objectives: the company itself (including its employees, stakeholders, customers, and management team) and the shareholders. When the various objectives of the company and the shareholders are aligned (as shown on the following chart), everything runs smoothly.

But corporate and shareholder objectives can conflict over time. For example, a young management team might be eager to invest in the business, pursue acquisitions, and expand geographically, putting them in a capital consumption and investment mode.

In contrast, a shareholder base consisting of retirees who are no longer actively running the business might prefer a more conservative approach, focusing on extracting capital through distributions or dividends. This can create friction, as the management team may view distributing dividends as counterproductive when the business needs cash for growth.

Strategic and financial alternatives can help realign these goals, helping to meet the company’s and the shareholders’ objectives.

Figure 1: 

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Review of Strategic Alternatives

Once the imbalance of corporate and shareholder objectives is acknowledged, the next step is evaluating the best option. This involves considering the continuum of strategic alternatives. On one end, there are options involving minimal change, such as gifting shares to family members, which usually results in a lower valuation and liquidity. On the other end, a sale to a third party represents significant change.

Ultimately, the best strategic alternative will be based on a number of factors, including the need for liquidity and importance of maximizing value, the desire for the company to remain independent versus become part of a larger organization, and more.

Figure 2:

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For the purposes of this article, we will assume that the shareholders are going to pursue a sale of the company. Once that decision is made, shareholders must determine which buyer type will be best for them as well as the other stakeholders.

Understanding the two general types of buyers, operating companies and financial partners, can help owners identify the best potential acquirers.

Operating Companies
Within operating companies, there are two subtypes: a corporate/strategic buyer and a PE-owned strategic buyer (also known as a “hybrid”).

Corporate/Strategic Company
A corporate strategic buyer can be independently owned and not part of private equity, or publicly traded. A corporate strategic buyer represents a company that operates in the same or adjacent industry as the target company and who sees a fit with the target’s long-term business plans and/or synergies. This would likely be a 100% sale and may or may not require management continuity, but there may be a smaller universe of strategic buyers to explore.

Private Equity-Owned Strategic Company / Hybrid
Broadly speaking, a hybrid is defined as a private equity-owned strategic buyer. With a hybrid buyer, while there isn’t usually a requirement for an equity rollover, it is common to expect continuity in the management team for a period following close. Hybrid buyers can also theoretically pay a higher premium versus a traditional private equity firm or family office buyer given the immediate potential for revenue and cost synergies.

Financial Partners
On the financial partner side, the options include private equity firms and family offices.

Private Equity
Private equity involves traditional institutional money, raising capital from sources such as endowments, insurance companies, pension funds, and university funds. The capital pool is typically committed for a 10-year lifespan. In the first five years, a private equity fund focuses on investing and acquiring businesses. In the subsequent five years, they harvest these investments by selling the businesses.

Therefore, the typical hold period for private equity is four to five years. This can be attractive to some groups but not to others; some management teams and businesses may not want to go through a sale every four to five years, while others find it appealing, as it can create multiple opportunities to monetize any rollover investment (multiple “bites of the apple”).

Private equity often allows management teams to co-invest, meaning they can write a check and invest alongside the private equity fund. Additionally, many private equity funds implement equity incentive programs that enable management teams to earn equity without directly investing money. These incentives can lead to a significant payday for the management team when the business is sold again after growing in value.

Additionally, while private equity funds are reliant on management to operate the business, they can potentially provide resources, contacts, and strategic direction for management, as well as other ways to accelerate the growth of the business.

Each private equity fund is unique: Some are very hands-off and essentially financial investors while others are involved more operationally or strategically. When considering partnering with a private equity fund, it typically makes sense to meet with a few of them to determine which type is the best fit.

Family Office
Family offices consist of high-net-worth families who have recognized the investment opportunity to buy and hold companies. Unlike private equity, family offices don’t have a fixed fund life, as they use the family’s own money. This allows them to be more patient with investments, often holding them for the long term and typically putting less debt on the business. Family offices typically seek some cash flow from the business but don’t need immediate returns, making them more attractive for sellers that are looking for longer-term stability while remaining independent (i.e., not selling to a strategic or hybrid buyer).

Figure 3:

Key Considerations by Buyer Type
To maximize value and create the most options, a business will ideally be positioned to attract all buyer types. To do that, a business owner should address key considerations prioritized by financial buyers. Strategic buyers can mitigate issues like management strength or customer concentration through their resources. But financial buyers are more difficult to satisfy, as they do not bring any synergies and may be completely reliant on management to run the business (since they are investors and not operators).

The table below ranks the importance of company attributes that are the most meaningful to strategic/hybrid buyers and financial buyers.

Figure 4:

Preparing Well in Advance
Ideally, companies should start considering strategic alternatives and consulting with investment bankers well in advance of an ownership transition. This allows owners to position the business to be most attractive to all types of buyers.

To maximize value, a company should appeal to the most challenging buyer type to satisfy, which is often the financial buyer. By enhancing visibility into future growth, managing customer concentration, and positioning the business as a robust platform for expansion, businesses can maximize their valuation and achieve a successful ownership transition.