Case Study: Rationale for a Strategic Alliance
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Another consultant tells me about one of his friend's company. It's a contractor, owned by four partners, all of whom seem to be getting a little older, and one of whom (the friend) wants to cash out. We got talking about how to proceed. Normally, we'd be talking about how to increase valuation, especially in a company dominated by a single shareholder. The partnership makes things a little bit trickier.
Why trickier? Consider the problems of negotiating the valuation of the company, an agreement between the partners to sell, and the likelihood that all four of them won't agree to the valuation or the final deal, even after a lot of wrangling.
What to do? Let's think through the valuation first. A single partner selling his shares probably won't get full market value, as the other shareholders will retain control. So he'll get something less that his full twenty-five per cent of the company, maybe substantially less. That's the source of the wrangling I mentioned.
It is not clear if the other partners want to sell their portion of the company right now. If we assume they don't, my friend's friend probably isn't going to be satisfied with the offer from his partners.
There is an alternative. Construction companies are possibilities for sale to a larger entity. If they can find a true strategic alliance, the price for the company may increase, perhaps substantially, maybe even very substantially.
That's what the partners should try to do, find a strategic buyer, who, once it combines all the companies, finds true economies of scale and is willing to pay more because, ultimately, the net profit from the combined entities will greatly exceed the profit from the two entities standing alone. As a consultant, I hear a lot about the benefits of synergies. I always discount those discussion because it is a rare occasion when synergies actually produce increased profits.
I am thinking that, in this case, there may actually be synergies for a strategic buyer if it doesn't overpay and is capable of carefully managing the combined entities.
We'll see.